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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
{x} Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended June 29, 1996.
or
{ } Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the transition period from __________to____________.
Commission file Number: 33-67908
Mosler Inc.
(Exact name of registrant as specified in its charter)
Delaware 31-1172814
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
8509 Berk Blvd.
Hamilton, Ohio 45015-2213
(Address of principal executive office)
(513)-870-1900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12 (g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10K. [X]
There is no market for the Company's common stock.
As of September 4,1996, there were 2,153,259 shares of Common Stock
outstanding.
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Mosler Inc.
Index to Annual Report on Form 10-K
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Page
Part I
Item 1 Business 3-12
Item 2 Properties 13
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 14
Part II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters 14
Item 6 Selected Financial Data 15-16
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-28
Item 8 Financial Statements and Supplementary Data 29
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 30
Part III
Item 10 Directors and Executive Officers of the Registrant 31-32
Item 11 Executive Compensation 33-36
Item 12 Security ownership of Certain Beneficial Owners
and Management 37
Item 13 Certain Relationships and Related Transactions 38
Part IV
Item 14 Exhibits, Financial Statements Schedule, and Reports
on Form 8-K 39-40
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Part I
Item 1 - Business
The Company
Mosler Inc. (the Company) is a major provider and servicer of security
systems and products. The Company manufactures, markets, installs and services
security systems and products used by financial institutions and other
commercial and industrial entities. Founded in 1867, the Company's business
historically was based on the manufacture and sale of vaults, safes and other
physical security products. In recent years, the service of such products and
the manufacture, marketing, installation and service of electronic security
systems has become increasingly important to the Company. The Company
estimates that during fiscal year 1996 approximately 60% of its gross profit
was generated through the repair and service of security systems and products
provided by the Company and others. The Company currently manufactures and
sells electronic security systems, access control systems, CCTV systems,
burglar and fire alarms, currency handling equipment, drive-in banking
systems, modular vaults, vault doors, security containers and safes.
In 1967, the Company's predecessor in interest, The Mosler Safe Company,
was acquired by American Standard Inc. In 1986, the Company was incorporated
as a Delaware corporation by an investor group comprised of senior management
of the Security Products Division of American Standard Inc. and affiliates of
Kelso & Co., Inc. ("Kelso"). In July 1986, the Company acquired the assets and
business of the Security Products Division, including the stock of The Mosler
Safe Company, from American Standard Inc. for approximately $156 million. The
acquisition was financed with approximately $150 million of debt and
approximately $15 million of equity.
On May 23, 1990, the Company merged (the "Merger") with a corporation
organized by Kelso Investment Associates IV, L.P.("KIA IV"), a Delaware limited
partnership, and an affiliate. In connection with the Merger and intermediate
transactions, all of the shares of the Company's Class A Common Stock (the "Old
Common Stock"), were exchanged, at the option of the holder, for either (i) $79
in cash plus .17 shares of the Company's Series D Preferred Stock (the "Cash
and Preferred Stock Consideration") or (ii) 7.9 shares of common stock and
.17 shares of Series D Preferred Stock (the "Common and Preferred Stock
Consideration"). Approximately 1,068,127 shares of Old Common Stock,
representing 89.4% of the Old Common Stock outstanding prior to the Merger on
a fully-diluted basis, were exchanged for the Cash and Preferred Stock
Consideration and approximately 127,498 shares of Old Common Stock,
representing 10.6% of the Company's Old Common Stock outstanding prior to the
Merger on a fully-diluted basis, were exchanged for the Common and Preferred
Stock Consideration. In the Merger, KIA IV and the affiliate purchased an
aggregate of 1,400,000 shares of common stock. Also in connection with the
Merger, the Company purchased from BancBoston Capital Inc. ("BancBoston") all
shares of a previously outstanding series of preferred stock of the Company.
All of the transactions described above are collectively referred to herein as
the "1990 Transaction."
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Sources of funds for the 1990 Transaction included approximately $80
million from proceeds of borrowings under a Credit Agreement dated as of
May 19, 1990 and approximately $14 million from KIA IV and its affiliate.
In conjunction with the 1990 Transaction, Mosler solicited and obtained from
the holders of its 12 1/2 % Senior Subordinated Debentures due 1998 a consent
to amend in certain respects the indenture relating to such Debentures
including, but not limited to, increasing the interest rate from 12 1/2% to
13 5/8% for interest accruing after May 23, 1990. The 1990 Transaction
resulted in an increase of the indebtedness of the Company from $83.3 million
to $163.3 million. The 1990 Transaction was not considered by generally
accepted accounting principles to result in a change of control of the Company
due to the significant continuing interest of certain stockholders and this
resulted in a decrease in the Company's common stockholders' equity of
$83.7 million.
On July 29, 1993, the Company completed a refinancing transaction
whereby it issued $115 million principal amount of 11% Series A Senior Notes
due April 15, 2003. A portion of the net proceeds from the notes were deposited
in trust to redeem all of the Company's 13 5/8% Senior Subordinated Debentures
($80 million) plus accrued and unpaid interest.
As of the date hereof, affiliates of Kelso own approximately 65% of the
common stock of the Company. The remaining common stock is owned by management,
directors and employees of the Company (including shares held in the Company's
401(k) Savings Plan for their benefit, and the Company's ESOP).
The Company's principal executive offices are located at 8509 Berk
Boulevard, Hamilton, Ohio 45012 and its telephone number is (513)870-1900.
Business
General
Mosler's broad array of security systems and products includes its
proprietary COMSEC/Invisicom monitoring system, which incorporates multi-point
alarm and CCTV monitoring and permits a customer with multiple branch locations
to report security data to a central location without interfering with the
customer's data processing network; the Autobanker drive-in banking system,
which delivers transactions efficiently via pneumatic tubes; a micro-processor
controlled currency handling system, which improves productivity through high
speed counting, sorting, bill facing and counterfeit detection; and bullet
resistant teller protection windows and counters. As part of its strategy to
expand its electronic security business, Mosler continues to develop
technologically sophisticated electronic security products.
The Company built its reputation as a major provider and servicer of
security systems and products by developing and marketing products to meet the
demanding security requirements of commercial banks and other financial
institutions. The Company believes that the technological expertise it has
developed to meet the standards of financial institutions should provide it
with a competitive advantage as it attempts to expand its sales in the
commercial and industrial market.
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The Company's service business has been a reliable source of cash flow.
Approximately 40% of the Company's service revenues are derived from service
agreements for providing ongoing maintenance. Although the majority of the
Company's service revenues are derived from servicing products provided by the
Company, the Company's service organization is equipped to handle the products
of other manufacturers. The Company's 1050 person service and sales
organization operates through approximately 70 offices located throughout the
country.
Products
The Company operates in two industry segment, physical security
products and electronic security systems.
The Company's operations can be divided into four general categories:
service, electronic security systems, physical security products and
international operations. The following table sets forth the Company's net
sales from each of these four categories as a percentage of total net sales
for each of the last three fiscal years:
Percentage of total net sales
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1996 1995 1994
Service. . . . . . . . . . .. 49.0% 49.9% 50.0%
Electronic security systems . . . 24.6 24.8 23.4
Physical security products . . . . 22.0 20.1 21.4
International. . . . . . . . . . . . . . . 5.7 5.9 6.4
Elimination of interdivision sales (1.3) (0.7) (1.2)
Total 100.0% 100.0% 100.0%
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Service
The Company believes that the capabilities of its service organization
significantly enhance the sale of its products. The Company services electronic
security systems, remote drive-in systems and physical security products it
produces, as well as products produced by other manufacturers. Service revenues
accounted for approximately 49% of the Company's net sales for fiscal 1996.
During fiscal 1996 service agreement sales decreased $1.4 million. Time
and material sales remained constant in fiscal 1996. Approximately 40% of the
Company's service revenues for fiscal 1996 were generated by services performed
under service agreements. The Company offers six maintenance plans, ranging
from plans that provide service only during business hours to plans that
provide service at any time. Service plans generally require advance payment
of a specified service fee. The remaining service revenues were generated by
individual customer service calls for which the customer was charged for labor
and materials.
The Company employs approximately 925 field service personnel. A
majority of the service personnel are located in the Company's approximately
70 domestic offices. The Company maintains a fleet of approximately 925
service vehicles for use by its service personnel.
To meet increased electronic security systems service requirements and
accommodate changes in technology, the Company will be required to increase
its servicing capability by continuing and expanding the practice of providing
electronic security systems training to a substantial percentage of its
existing field personnel, providing follow-up training sessions and recruiting
new personnel with electronics systems experience.
Electronic Security Systems
The Company engineers and manufactures electronic security systems for
both financial institutions and commercial and industrial customers. The
Company also engineers and manufactures drive-up banking systems for financial
institutions. Sales of electronic security systems accounted for approximately
25% of the Company's net sales for the year ended June 29, 1996.
The Company produces alarm and surveillance systems designed primarily
for financial institutions and retail stores.
A principal product in this area is the COMSEC security communications
system. COMSEC is a central monitoring and control security system designed for
use in a single building or a group of buildings anywhere in the U.S. COMSEC
utilizes two-way communications equipment to enable a console guard to monitor
security and fire alarms, control access to remote areas, receive reports and
initiate security checks and inquiries. A customer may purchase COMSEC on a
modular basis, so that additional system functions and additional remote
locations can be added to a COMSEC system at a later date.
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During fiscal 1996 the Company acquired a minority interest in PACOM
DATA PTY. Ltd. of Sydney, Australia. PACOM is a world leader in highly advanced
security communications, networking and systems development.
The Company also provides drive-in and walk-up transaction systems for
financial institutions, including equipment permitting sight-and-sound
communications between tellers and customers and customer identification.
Through a partnership with Toshiba, the Company also markets a line of currency
handling equipment including a micro-processor controlled currency handling
system which improves productivity through high speed counting, sorting, bill
facing and counterfeit detection. The Company also offers burglar and fire
alarms that provide signals locally or to a central station.
Mosler has recently introduced a line of products which provide a higher
level of security at both the entrance sites of facilities and also within the
facilities. These products, which are sourced from outside suppliers, include
automated security portals, turnstiles and metal detectors. The security
portals and turnstiles can be integrated with the access control system to
ensure only authorized personnel are allowed entry while also reducing
requirements for guards. The security portals can also be integrated with
metal detectors to provide screening for weapons without direct and continual
involvement of a guard.
The Company's electronic security systems are generally assembled by
Company personnel from components manufactured by others, including circuit
boards, data processing products and other components purchased both under
general contracts and pursuant to specific purchase orders.
On July 29,1993, the Company purchased Security Control Systems, Inc.
("Linx") for $6.8 million plus the assumption of certain liabilities and
obligations of Linx.
Linx is a developer of micro-computer based access control systems with
an installed base of approximately 250 systems. Linx has provided security
services for the U.S. space program as well as various Fortune 500 companies,
hospitals, financial institutions and correctional institutions. The Linx
acquisition provided the Company with a greater presence in the commercial
and industrial sector of the market for electronic security systems.
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Physical Security Products
The Company engineers, purchases and manufactures modular vaults, vault
doors, night depositories, safe-deposit boxes, drive-in windows and counter
systems for financial institutions. The Company also engineers and manufactures
money and record safes and insulated vault doors for financial institutions,
United States government agencies and contractors and other commercial and
industrial customers. Sales of physical security products accounted for
approximately 22% of the Company's net sales for the year ended June 29, 1996.
The Company closed its Hamilton, Ohio manufacturing facility on April 2,
1996. The plant closing is part of the Company's ongoing efforts intended to
improve its competitive position in the industry. The product lines that had
been manufactured at the Hamilton, Ohio plant were transferred to other Company
facilities or built to the Company's specifications by other manufacturing
companies. The plant closing and related shutdown expenses resulted in a
before tax charge of approximately $3.0 million.
The Company believes that it is the largest provider of Government
Containers in the United States. Government Containers are secured file
drawers, used by United States government agencies, including branches of the
United States armed forces, to protect documents, weapons and other materials
from espionage, theft and destruction. The Company also sells its Government
Containers to government contractors. United States sales to government
agencies and contractors accounted for approximately 6.0%, 4.0% and 4.0% of
the Company's net sales in fiscal years 1996, 1995 and 1994 respectively.
Due to increased competition in the physical security product market and
anticipated defense and federal government budget levels, the Company does not
anticipate any significant future growth in sales to government agencies and
contractors.
The Company manufactures and purchases a variety of physical security
products used by financial institutions, including vault doors, night
depositories, safe-deposit boxes, drive-in windows, counter systems and safes.
The Company also sells certain physical security products, like modular vaults,
manufactured by others. The Company's counter systems for financial
institutions include bank counters, check desks, coupon booths, under counter
steel cabinets, currency storage equipment and a variety of protective devices
constructed from bullet resistant material.
The Company also manufactures and purchases a line of fire and burglary
resistant products for commercial and industrial customers designed to protect
currency, securities and records. The principal products in this line are money
and record safes and insulated vault doors. These products are sold primarily
to food and drug retail chain stores, educational institutions and insurance
companies. The Company also manufactures a line of Dropository units, used by
utilities, libraries, schools, insurance companies and governmental collection
offices, designed to permit the payment of bills and the deposit of books and
other packages during non-business hours.
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International
The Company markets security products primarily to customers in Mexico,
Canada, the Caribbean basin, the Middle East and the Far East. The Company's
international sales accounted for approximately 6% of the Company's total net
sales for fiscal 1996. The Company maintains direct sales and service offices
in Mexico, Canada and the Caribbean and a manufacturing facility for physical
security products in Mexico. The Company has also entered into agreements with
licensees in Indonesia and the Philippines pursuant to which the licensees are
authorized to manufacture and sell certain of the Company's products in
accordance with designs, specifications and quality standards established by
the Company in exchange for the payment of specified fees and royalties. The
Company markets products in other international locations through independent
dealers. Due to high transportation costs, the Company exports only a limited
number of physical security products from its facilities in the United States.
The Company is attempting to develop new products and services for the
international market through participation in ventures with other
manufacturers.
For financial information about the Company's international
operations, see Note 13 of the Consolidated Financial Statements.
Principal Markets
As a result of recent trends in the financial institutions market, the
Company believes that sales of electronic security systems to financial
institutions will show greater growth than sales of physical security
products. Sales of electronic security systems are cost justified by a number
of factors, including the need for greater security at remote locations, the
desire for centralized monitoring and the reduction of personnel and other
costs resulting from the implementation of improved technology. Sales of
physical security products are primarily dependent upon branch openings and
renovations. In addition, as a result of branch mergers and consolidations,
the Company has experienced increased interest by merged banks in integrating
existing security systems and implementing labor saving security systems.
With respect to sales of physical products, the trend toward banking
deregulation has resulted in the increased use of "limited branch" operations.
In contrast to full service operations, limited branches are smaller and
require fewer physical security products.
The Company estimates that the revenues generated from initial security
product sales to a new limited branch and in connection with a branch
renovation are approximately 25% and 50%, respectively, of the revenues
generated from initial security product sales to a new full service branch.
As part of its strategy to expand its presence in the commercial and
industrial markets, the Company is attempting to expand sales of its electronic
security systems (including access control systems) to commercial and
industrial facilities for use in retail chain stores and office and other
commercial buildings. The Company has installed integrated electronic security
systems at the American Express Company headquarters in New York City and has
also provided electronic security systems to Martin Marietta and TRW facilities
and the K-Mart and J.C. Penney retail chains. Mosler is pursuing the segment
of the commercial
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and industrial electronic security market in which customers have a requirement
for a high level of security. Included in this segment are technology firms,
brokerage firms, retail chains with large stores, defense contractors, museums
and universities. The Company expects access control and CCTV to be a major
source of growth in the commercial and industrial electronic security business.
With the exception of Government Containers, which are sold to a limited
group of government agencies and contractors, sales of the Company's products
and services are not dependent upon a single customer or a few customers. The
Company provides products and services on a nationwide basis, and its business
is not dependent on any particular geographic region. The Company's sales are
not subject to significant seasonal variations.
Warranty and Service
The Company generally warrants its products for periods ranging up to
one year against defective material and workmanship under normal use and
service. The Company's obligations under such warranties are limited to
repairing or replacing, free of charge, any defective parts. In negotiating
specific sales contracts, the Company may increase or otherwise modify its
standard warranties.
Competition
The Company is subject to competition in the sale and service of
physical security products and electronic security systems. Price and service
are the principal methods of competition for physical security product sales in
the financial institution market. The Company is one of the largest providers
of physical security products for financial institutions although in recent
years its share of this market has declined slightly. The Company's principal
competitors in this market are Diebold, Inc., Canton, Ohio and the LeFebure
division (Cedar Rapids, Iowa) of De La Rue Co. p.l.c., the United Kingdom. The
financial institutions market is also shared by a number of smaller regional
and national manufacturers. The Company's principal competitors for physical
security products internationally are Chubb & Son plc, the United Kingdom, and
Fichet Bauche, France. The Company has experienced significantly greater
competition in the commercial and industrial sector for its physical security
products and electronic security systems than in the financial institution
market.
The Company believes that it is the largest provider of Government
Containers in the U.S. The Company's principal competitor in the production of
these Government Containers is Hamilton Products, Amelia, Ohio. Overly Co.,
located in Greensburg, PA, manufactures security vault doors for United States
government agencies in competition with the Company. Competitors in this market
must comply with government specifications applicable to each product.
The Company competes with a number of major manufacturers in the
commercial and industrial markets for integrated electronic security systems,
including ADT Security Systems, Honeywell Inc. and Litton Industries, Inc. The
principal methods of competition in this market are product design features
(including customized applications), price and service.
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The Company focuses its marketing efforts for its electronic security systems
on customers whose primary concern is security (as opposed to control of
heating, ventilation and air-conditioning) and for whom a stand-alone
proprietary system may be appropriate. In contrast, many of the Company's
competitors emphasize systems controlling heating, ventilation and
air-conditioning (with certain security features) or systems which are linked
to a central alarm station. Many of the Company's competitors in this market
have substantially greater financial resources than the Company and have
developed reputations for system design capability.
Sources of Supply
The Company is not substantially dependent on any one supplier except
that the Company purchases electronic locks for Government Containers from the
only currently government approved supplier of these electronic locks. The
Company believes its sources of supply for materials used in manufacturing and
assembling its products are adequate for its needs.
Trademarks and Patents
The Company's principal trademark is the "Mosler" name. The Company has
been doing business under the Mosler name since 1867 and has developed a
reputation as a major supplier of quality security products. The Company also
has a number of other trademarks, including the names "COMSEC," "Invisicom,"
"Linx," "Autobanker," "Magna" and "Dropository".
The Company holds patents for 27 security products, including certain
remote transaction systems, vault doors, night depositories, locks and
safe-deposit boxes. No patent or group of patents is, in the opinion of the
Company's management, of material importance to its business.
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Backlog
The Company's backlog of orders was approximately $23.4 million at
June 29, 1996 compared with $26.3 million at June 24, 1995. The Company expects
that substantially all of its backlog at June 29, 1996 will be shipped in the
next 12 months. Except for certain long-term contracts, revenue from the sale
of the Company's products, after provision for installation, is recognized when
products to be installed for customer orders are shipped from the plants.
Government Contracts
Approximately 4% of the Company's net sales in fiscal 1996 and fiscal
1995 were made under contracts with United States government agencies or
contractors. Most government contracts are subject to the provisions of the
regulatory statutes applicable to government defense program contracts or
subcontracts and contain standard terms, including provisions for price
redetermination as well as termination for the convenience of the government.
The Company's sales to United States government agencies and contractors are
dependent upon the continued approval of its products by the GSA. The Company
has been subject to governmental audits of costs under contracts with United
States government agencies and contractors. The most recent of such audits
was concluded in 1991.
Research and Development
The Company conducts a research and development program for electronic
security systems and physical security products. During fiscal 1996, the
Company's research and development costs for electronic security systems and
physical security products were $2.6 million and $0.1 million, as compared to
$2.8 million and $0.1 million and $2.9 million and $0.4 million for such
purposes in fiscal 1995 and fiscal 1994 respectively.
Environmental Regulation
Certain of the Company's operations are subject to Federal, state and
local environmental laws and regulations. The Company believes that the
Company is currently in material compliance with all environmental and
pollution control laws applicable to the conduct of its business.
Employees
At June 29, 1996, the Company employed 1693 persons. Of this number 114
were employed in the manufacture and sale of physical security products, 128
were employed in the manufacture and sale of electronic security systems, 1050
were employed in sales and service operations, 183 were employed in
international operations and the remainder provided management, administrative
and clerical support. Approximately 150 of the Company's employees are located
outside the United States. Employees at two of the Company's four manufacturing
plants are covered by collective bargaining agreements with various unions.
These agreements expire at various times in 1996 and 1997.
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Item 2 Properties
The Company owns safe, vault door, safe-deposit box and other physical
security equipment manufacturing facilities in Franklinville, New York, and
Mexico City, Mexico. The Company also leases facilities for production of
physical security products in Buffalo, New York. Electronic security
surveillance systems, remote transaction systems and film cameras are
manufactured at a leased facility located in Wayne, New Jersey. A research and
development facility for electronic security is leased in Chatsworth,
California. Warehousing facilities for these products are maintained at the
above locations. The Company's headquarters is located in Hamilton, Ohio, as is
a training and educational center for the Service Division. During 1996, the
Company's plant in Hamilton, Ohio was closed as part of the Company's announced
restructuring.
The Company leases approximately 80 offices in various locations
throughout the United States. These facilities are used for office, warehouse
and servicing purposes. The lease terms range from one to seven years and many
of the leases are renewable at the Company's option.
The Company believes that its properties are suitable to its business
and have productive capacities adequate for its anticipated needs. However,
the Company believes that it may have excess manufacturing capacity and is
evaluating various alternatives to address this situation.
The Company leases and owns a fleet of approximately 925 service
vehicles for use by its service representatives. The majority of the fleet is
leased. The service vehicles consist of vans (approximately 45%), automobiles
(approximately 12%), pick-ups and light duty trucks (approximately 40%), large
installation trucks (approximately 1%) and trailers (approximately 2%). The
Company replaces approximately one-third of the service vehicles each year.
Item 3 Legal Proceedings
The Company is involved in routine litigation arising in the ordinary
course of its business including claims against the Company involving alleged
thefts from facilities in which the Company's security products were
installed. The Company does not expect any of such actions to result in a
finding that would have a material adverse effect on the Company's financial
condition, results of operations, or cash flows.
The Company is from time to time subject to lawsuits arising out of
automobile accidents involving the Company's vehicles. The Company is also a
party to various other actions arising out of the normal course of its
business. The Company maintains liability insurance against risks arising out
of the normal course of its business.
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Item 4 Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
quarter ended June 29, 1996.
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's equity securities are not traded in any market. As of
September 24, 1996, there were 121 holders of the Company's Common Stock.
No dividends have been paid on the Company's Common Stock in the last two
fiscal years.
The Company intends to utilize earnings to pay down debt and fund
growth of its business and does not anticipate paying any cash dividends on
its Common Stock. Under the various covenants in the Credit Agreement of
September 1, 1995 between the Company and Star Bank (the "Credit Agreement"),
the Company is limited in paying cash dividends on its Common Stock &
Preferred Stock.
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ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
FISCAL YEAR ENDED LAST SATURDAY IN JUNE
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1992 1993 1994 1995 1996
(dollars in thousands)
Consolidated Statement of
Operations Data:
Net sales $203,749 $210,622 $214,451 $216,913 $218,260
Gross profit 46,080 50,130 46,955 51,702 49,124
Selling and
administrative expenses 35,630 35,549 38,689 37,915 36,493
Restructuring charges (d) 951 2,989
Other (income) expenses 1,539 (378) 413 (11) (254)
Operating income 7,960 14,959 7,853 13,798 12,885
Net interest expense(a) 20,152 19,009 17,198 17,021 18,267
Loss before income taxes,
extraordinary item and
cumulative effect of
accounting change (12,192) (4,050) (9,345) (3,223) (5,382)
Provision for income taxes 495 700 336 59 65
Loss before extraordinary
item and cumulative effect
of accounting change (12,687) (4,750) (9,681) (3,282) (5,447)
Extraordinary item(b) (3,054)
Cumulative effect of
accounting change(c) (10,300)
Net loss (12,687) (4,750) (23,035) (3,282) (5,447)
Preferred stock dividends(e) (5,794) (6,664) (6,522) (8,285) (8,796)
Net loss applicable to
common stockholders ($18,481) ($11,414) ($29,557) ($11,567) ($14,243)
Loss before extraordinary
item and cumulative effect
of accounting change per
common share ($7.46) ($4.71) ($6.87) ($5.01) ($6.51)
Loss per common share ($7.46) ($4.71) ($12.52) ($5.01) ($6.51)
Consolidated Balance Sheet Data:
Total assets $134,619 $117,792 $122,198 $114,531 $109,125
Long-term debt, including
current portion 134,350 123,417 131,650 130,552 133,948
Redeemable preferred stock 43,984 53,440 59,009 68,303 77,737
Total common stockholders'
deficiency (f) (93,365) (108,190) (134,960) (148,622) (162,866)
</TABLE>
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(a) Represents interest expense applicable to the 13 5/8% Debentures (including
amortization of debt discount), the 11% Senior Notes due 2003, interest
expense applicable to the indebtedness under the Credit Agreement, cost of
interest rate protection agreements, miscellaneous interest expense and
non-cash interest expense accrued on unpaid dividends applicable to the
Company's preferred stock, all net of interest income. Includes
amortization of debt discount and deferred debt issuance costs resulting
from the acquisition of the Company from American Standard Inc. in 1986 and
the 1990 Transaction.
(b) Includes write-off of debt costs for early retirement of 13 5/8%
Debentures.
(c) Includes cumulative effect of adoption of Statement of Financial Accounting
Standards No. 106.
(d) Includes costs for closing Hamilton, Ohio manufacturing plant of $3.0
million in 1996.
(e) Includes dividends declared and paid on the Series C Preferred Stock,
undeclared and unpaid dividends on the Series D Preferred Stock and
amortization of discount on the Series D Preferred Stock. Excludes interest
on accrued but unpaid dividends on the preferred stock. The Company has not
paid any preferred dividends in cash since fiscal 1990.
(f) Includes a reduction of $83.7 million attributable to the 1990 Transaction.
<16>
<PAGE>
Item 7 Management's Discussion and Analysis of Financial Condition
And Results of Operations
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements included elsewhere in
this Form 10-K. Many of the statements in Management's Discussion and
Analysis of Financial Condition, including the following discussion of the
security industry, set forth management's opinions with respect to present or
future trends or factors affecting the operations, markets, or products of
Mosler Inc. and its consolidated subsidiaries.
Overview
The Company is a major provider and servicer of security systems and
products to financial institutions. While consolidation within the banking
industry has reduced the pace of bank branch construction and intensified
competition among providers of security products, the Company believes that
consolidation will ultimately benefit its business by creating additional
demand both for physical security products as merged branches are remodeled
and for electronic security products and services as merged banks continue to
integrate and upgrade their electronic security systems. Additionally, the
Company believes that its broad product line and technologically sophisticated
service and sales organization combined with its nationwide presence position
it to continue to be a preferred supplier as financial institutions
consolidate.
Historically, the Company has also generated significant revenues from
the sale of Government Containers. Sales of Government Containers declined from
fiscal 1988 to fiscal 1996 from $35.1 million to $8.8 million. The Company
believes that the decline in these sales roughly parallels defense procurement
spending. Although the Company does not expect the sale of Government
Containers to be a source of revenue growth, the Company continues to take
steps to make sales of Government Containers profitable at current sales
levels.
While the Company has begun to benefit from the recent improvement in
banking industry profitability, management continues to pursue a strategy
designed to reduce its dependence on the financial institution security market
by increasing its focus on the commercial and industrial electronic security
systems markets in order to expand its product line to include user-friendly
products suited to the specific needs of commercial and industrial customers.
In addition to pursuing its strategy of reducing its reliance on
financial institutions, the Company continues to improve its cost position
through plant closings, product line rationalization and manufacturing process
improvements.
For certain internal reporting purposes, the Company periodically
estimates the operating income attributable to its service and international
operations and the sale of electronic security systems and physical security
products. Such estimates are at best somewhat subjective approximations, in
that they involve inexact allocations of overhead and other expenses that are
not directly attributable to specific activities. Subject to the foregoing,
<17>
<PAGE>
internal operating income estimates indicate that for the last several years,
the sale of both electronic security systems and physical security products
have not been profitable; however, when the service operating income is added
to them, the Company was profitable on an operating basis. Any profits from
international operations have been insignificant. It should be noted that the
Company's management increasingly views its operations on an integrated basis.
<18>
<PAGE>
Results of Operations
The following table sets forth certain operating data of the Company for
fiscal 1996, 1995 and 1994. The following table and discussion separates net
sales and gross profit information for certain categories of the Company's
products.
FISCAL YEAR ENDED LAST
SATURDAY IN JUNE
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
(Dollars in thousands)
Net sales:
Service $106,901 $108,307 $107,268
Electronic security systems 53,599 53,742 50,219
Physical security products 47,966 43,628 45,976
International 12,502 12,766 13,811
Elimination of interdivision sales (2,708) (1,530) (2,823)
Total net sales 218,260 216,913 214,451
Gross profit:
Service 28,944 30,598 29,252
Electronic security systems 9,611 9,681 11,449
Physical security products 10,093 8,003 2,647
International 3,465 3,420 3,607
Total gross profit *52,113 51,702 46,955
Net interest expense 18,267 17,021 17,198
Net loss ($5,447) ($3,282) ($23,035)
Change in Net Sales From Prior Periods:
Service -1.3% 1.0% -3.9%
Electronic security systems -.3% 7.0% 33.1%
Physical security products 9.9% -5.1% -3.0%
International -2.1% -7.6% -12.9%
Elimination of interdivision sales 77.0% 45.8% 44.3%
Change in total net sales .6% 1.1% 1.8%
Operating Data as a Percentage of
Product Net Sales:
Gross profit:
Service 27.1% 28.3% 27.3%
Electronic security systems 17.9% 18.0% 22.8%
Physical security products 22.2% 18.3% 5.8%
International 27.7% 26.8% 26.1%
Total gross profit 22.5% 23.8% 21.9%
Selling and administrative expense 16.7% 17.5% 18.0%
Operating income (loss) 7.5% 6.4% 3.7%
<FN>
*Does not include Hamilton, Ohio plant closing of approximately $3.0 million.
</FN>
</TABLE>
<19>
<PAGE>
Fiscal 1996 Compared with Fiscal 1995
Net Sales
The Company's net sales increased during fiscal 1996 by 0.6% to $218.3
million from $216.9 million. The increase in sales was due primarily to
improvement in physical security bank product sales of $3.7 million resulting
from increased financial institution activity.
Service revenues decreased during fiscal 1996 by 1.3% to $106.9
million from $108.3 million. The decrease was attributable to a decline in
service agreement sales resulting from continued financial institution
mergers and competitive pricing.
Net sales of electronic security systems decreased by 0.3% to $53.6
million from $53.7 million. This decrease was primarily attributable decreases
in COMSEC and card access sales partially offset by improved remote transaction
and commercial alarm sales.
Net sales of physical security products increased 9.9% to $48.0 million
from $43.6 million. Financial institution sales increased 16.8% and counter
systems sales increased 7.6% in fiscal 1996 partially offset by a decline in
commercial physical product sales. Sales of government security containers
increased slightly in fiscal 1996.
Net sales of the Company's International operations decreased 2.1% to
$12.5 million from $12.8 million. The decrease was primarily attributable to
economic problems and the devaluation of the peso in Mexico. The decrease in
the value of the peso was partially offset by an increase in export sales.
Gross Profit
Gross profit before plant closing costs increased during fiscal 1996 by
1.9% to $52.1 million from $51.7 million. Gross profit as a percentage of sales
decreased to 22.5% for fiscal 1996 from 23.8% for fiscal 1995.
Gross profit from service revenues decreased during fiscal 1996 by 5.4%
to $28.9 million from $30.6 million. Gross profit as a percentage of service
revenues decreased in fiscal 1996 to 27.1% from 28.3% in fiscal 1995. The
decrease in gross profit and gross profit as a percentage of revenues is due
to the decrease in sales volume without an offset in labor and travel costs
partially offset by reduced parts costs.
Gross profit from the sale of electronic security systems decreased
0.7% to $9.6 million from $9.7 million. Gross profit as a percentage of sales
from the sales of electronic systems products decreased to 17.9% for fiscal
1996 from 18.0% for fiscal 1995. The decrease in gross profit and the
percentage of gross profit is due to increased installation cost.
Gross profit from the sale of physical security products increased by
25.0% to $10.0 million from $8.0 million. Gross profit as a percentage of
sales from the sale of physical security products increased to 22.2% from
18.3% for fiscal 1995. The increase in gross profit and the percentage of
gross profit is due to additional gross margins on the increase in sales
volume and reduced warranty costs.
<20>
<PAGE>
Gross profit from the Company's International operations increased by
1.3% to $3.5 million from $3.4 million for fiscal 1995. Gross profit as a
percentage of sales from the Company's International operations increased to
27.7% from 26.8% for fiscal 1995. The increase in gross profit was primarily
due to improved margins.
Selling and Administrative Expenses
Selling and administrative expenses decreased during fiscal 1996 by 3.8%
to $36.5 million from $37.9 million. Selling and administrative expenses as a
percentage of sales decreased to 16.7% from 17.5% for fiscal 1995. The
decrease was primarily due to reduced administrative expense partially offset
by an increase in marketing communication and selling expense.
Operating Income
The Company's operating income during fiscal 1996 before plant closing
costs increased 15.2% to $15.9 million from $13.8 million. Operating income
as a percentage of sales increased to 7.5% in fiscal 1996 from 6.4% for fiscal
1995. The increase in operating income was due to the increase in gross
profit and the reduction in selling and administrative expenses.
Net Interest Expense
Net interest expense, including amortization of debt issuance costs,
increased 7.6% to $18.3 million from $17.0 million due to an increase in
average borrowing of 6.0% and an increase in rate of 5.0%. Accrued interest
expense on the unpaid preferred stock dividends increased 27.3% to $2.8
million from $2.2 million.
Net Loss
Net loss increased during fiscal 1996 to $5.4 million from $3.3 million
in fiscal 1995. Included in the net loss of fiscal 1996 is a one time
adjustment of $3.0 million for Hamilton Ohio plant closing costs.
Inflation
The Company believes that its business is affected by inflation to
approximately the same extent as the national economy. Generally, the Company
has been able to offset the inflationary impact of wages and other costs
through a combination of improved productivity, cost reduction programs and
price increases. The Company has had difficulty in effecting significant
price increases because of the discounting practices of its competitors.
Plant Closings
On April 2, 1996 the Company closed its manufacturing operations
in Hamilton, Ohio. The Company's headquarters remains on Berk
<21>
<PAGE>
Boulevard in Hamilton, Ohio. The plant closing is part of the Company's
ongoing efforts intended to improve its competitive position in the industry.
The marketplace has changed in recent years and after reviewing all aspects
of the operations, including the 350,000 square foot Hamilton plant which
opened in 1891, the decision was made to close the plant. The size, age and
condition of the Hamilton plant made it virtually impossible to continue to
manufacture in a cost effective manner. The Company recorded restructuring
charges of approximately $2,989,000 ($1.37 per share) to close the Hamilton,
Ohio plant. The restructuring charges were comprised of termination benefits
of $1,764,000 for approximately 140 employees and other associated exit costs,
substantially all of which had been paid at June 29, 1996, and an accrual for
plant disposal of $1.6 million. In connection with the plant closing, the
Company also recorded a net gain of approximately $1.6 million for the
curtailment of certain pension and post-retirement health care benefit
liabilities. In addition, included in products cost of sale for 1996 are
charges of approximately $.5 million for the relocation of equipment,
inventory and personnel and related travel expenses associated with the
plant closure.
<22>
<PAGE>
Fiscal 1995 Compared with Fiscal 1994
Net Sales
The Company's net sales increased during fiscal 1995 by 1.1% to $216.9
million from $214.5 million. The increase in sales was due to the improvement
in CCTV sales of $2.2 million, commercial card access sales of $2.4 million and
service repair sales partially offset by a decline in government security
container sales.
Service revenues increased during fiscal 1995 by 1.0% to $108.3 million
from $107.3 million. The increase was attributable to an improvement in repair
sales of $5.3 million partially offset by decline in service agreement sales of
$3.5 million. The decrease in service agreement sales is partially due to
financial institutions canceling their service agreements and replacing them
with time and material agreements.
Net sales of electronic security systems increased by 7.0% to $53.7
million from $50.2 million. This increase was primarily attributable to
increases in CCTV sales and commercial card access systems partially offset by
a decline in Linx's product sales.
Net sales of physical security products decreased 5.1% to $43.6 million
from $46.0 million. Sales of government security containers decreased 21.1%
to $8.6 million from $11.0 million.
Net sales of the Company's International operations decreased 7.6% to
$12.8 million from $13.8 million. The decrease was attributable to two safe
deposit box sales and a major vault door refinishing in fiscal 1994 that did
not repeat in fiscal 1995.
Gross Profit
Gross profit increased during fiscal 1995 by 10.1% to $51.7 million from
$47.0 million. Gross profit as a percentage of sales increased to 23.8% for
fiscal 1995 from 21.9% for fiscal 1994.
Gross profit from service revenues increased during fiscal 1995 by 4.6%
to $30.6 million from $29.3 million. Gross profit as a percentage of service
revenues increased in fiscal 1995 to 28.3% from 27.3% in fiscal 1994. The
increase in gross profit and gross profit as a percentage of revenues is due
to the increase in sales volume and reduction in overhead costs.
Gross profit from the sale of electronic security systems decreased
15.4% to $9.7 million from $11.4 million. Gross profit as a percentage of
sales from the sales of electronic systems products decreased to 18.0% for
fiscal 1995 from 22.8% for fiscal 1994. The Company experienced increased
discounting during fiscal 1995 in addition to increased warranty, contract
variances and increased engineering expenses.
<23>
<PAGE>
Gross profit from the sale of physical security products increased by
202.3% to $8.0 million from $2.6 million. Gross profit as a percentage of
sales from the sale of physical security products increased to 18.3% from 5.8%
for fiscal 1994. The increase in gross profit and the percentage of gross
profit is due to improved standard margins and favorable spending variances.
Included in cost of sales for fiscal 1994 were the costs of moving the lock
production from Sargent & Greenleaf to Hamilton, Ohio and some lost
efficiencies occurring from the closure and movement of production from the
Orangeburg plant. These costs did not repeat in fiscal 1995.
Gross profit from the Company's International operations decreased by
5.2% to $3.4 million from $3.6 million for fiscal 1994. Gross profit as a
percentage of sales from the Company's International operations increased to
26.8% from 26.1% for fiscal 1994. The decrease in gross profit was primarily
due to the decrease in margins due to a decline in sales.
Selling and Administrative Expenses
Selling and administrative expenses decreased during fiscal 1995 by
2.0% to $37.9 million from $38.7 million. Selling and administrative expenses
as a percentage of sales decreased to 17.5% from 18.0% for fiscal 1994. The
decrease was primarily due to the discontinued consumer products operations
which accounted for $1.0 million of the selling and administrative expenses
in fiscal 1994. Reduced research and development expenses in fiscal 1995 were
offset by increased expenses for executive severance agreements and associated
expenses.
Operating Income
The Company's operating income during fiscal 1995 increased 75.7% to
$13.8 million from $7.9 million. Operating income as a percentage of sales
increased to 6.4% in fiscal 1995 from 3.7% for fiscal 1994. The increase in
operating income was due to the increase in gross profit and the reduction in
selling and administrative expenses.
Net Interest Expense
Net interest expense, including amortization of debt issuance costs,
decreased slightly to $17.0 million for fiscal 1995.
Net Loss
Net loss decreased during fiscal 1995 to $3.3 million from $23.0 million
in fiscal 1994. Included in the net loss of fiscal 1994 is a one time
adjustment of $10.3 million for the cumulative effect of a change in accounting
for postretirement benefits (FAS 106) and an extraordinary loss of $3.1 million
related to early retirement of debt.
<24>
<PAGE>
Liquidity and Capital Resources
On September 1, 1995 the Company entered into a $29.5 million credit
facility with a group of banks represented by Star Bank, N.A. of Cincinnati,
Ohio. The proceeds of the facility were used to refinance the Company's
existing bank indebtedness and for general corporate purposes. Included in the
$29.5 million credit facility is a $4.0 million term loan payable quarterly
for four years. The Company repaid the $20.4 million outstanding bank debt
along with all closing fees. Borrowings under the credit facility bear
interest at the prime lending rate plus 0.5% or LIBOR plus 3.0%.
Cash used by operating activities was $1.5 million for fiscal 1996 as
compared to cash provided of $6.1 million for fiscal 1995 for an unfavorable
variance of $7.6 million. Net loss increased $2.2 million. This increased
loss was due to the Hamilton, Ohio plant closing costs. Accounts receivable
increased $8.7 million in fiscal 1996 as compared to an increase of $1.5
million in fiscal 1995. The increase was due to an increase in revenues not
completely installed awaiting final billing to the customer and accounts
receivable for the sale of Hamilton, Ohio manufacturing plant inventory to
other manufacturing facilities in the amount of $1.8 million. The increase
in installed receivables awaiting final billing is a timing issue and will be
adjusted in the first half of fiscal 1997. These unfavorable variances were
partially offset by reductions in inventories.
The Company's capital expenditures were $4.8 million for fiscal 1996 as
compared to $1.2 million for fiscal 1995. Included in fiscal 1996 capital
expenditures is a project to install a field technicians central dispatch and
information system and a project to replace the Company's order entry and
general ledger system. Funds required for the Company's future capital
expenditures will come from several sources, including operating cash flow,
the Company's revolving credit facility and third-party financing to the
extent permitted by the Company's debt instruments. The Company's operating
plan for fiscal 1997 anticipates capital expenditures of $2.5 million.
The Company currently makes cash contributions to the ESOP only to the
extent necessary to fund the cash needs of the ESOP for payments to retired,
terminated and deceased participants and for administrative expenses.
The Company is required to maintain certain financial debt covenants
under the September 1, 1995 credit agreement. On August 30, 1996, due to the
cost of the Hamilton, Ohio plant closing, the Company was in violation of
several financial debt covenants. On August 30, 1996, the Company received
a one-year waiver of all these violations.
<25>
<PAGE>
The following table compares the actual condition as of June 29, 1996
with the required debt covenants.
<TABLE>
<CAPTION>
<S> <C> <C>
Covenants Actual Required
$(000) FY 1996 Covenant
Ratio of total liabilities to
tangible net worth 5.50 4.25
Accounts Receivable
Turnover ratio not to exceed 82 85
Fixed charge coverage covenant
no less than 0.90 1.15
Interest Expense 1.43 1.70
Minimum ebitda 20,971 25,000
</TABLE>
<26>
<PAGE>
The Internal Revenue Service (IRS) has conducted examinations of the
Company's income tax returns for fiscal years 1988 through 1993 and has
proposed various adjustments to increase taxable income. The Company has
agreed to certain issues and has previously recorded a provision for
additional income tax and interest in the accompanying consolidated financial
statements. Three issues remain unresolved, and the IRS has issued deficiency
notices on these issues. The issues relate to 1) the allocation of the
Company's purchase price of assets from American Standard, 2) the value of
the Company's Series C preferred stock contributed to its ESOP and 3) the
deduction of certain costs incurred in connection with the 1990 transaction.
This matter should not affect liquidity in fiscal year 1997.
The Company allocated approximately $70 million of the purchase price
of assets from American Standard to intangible assets which are being
amortized over a period of generally 14 years. The IRS proposes to reduce
this allocation to approximately $45 million and increase the amortization
period to generally 45 years.
In 1990 and 1993, the Company contributed to its ESOP, and claimed a
tax deduction for, shares of Series C preferred stock having a value
aggregating approximately $9.6 million. The IRS proposes to reduce this
value to approximately $7.1 million.
The Company capitalized costs amounting to approximately $7.1 million
in connection with 1990 transaction involving debt and common stock, and is
amortizing such costs over the life of the related debt. The IRS has taken
the position that all costs incurred in connection with a redemption of stock
are non-deductible and propose to disallow the full amount. In August, 1996,
Congress passed the Small Business Act. Act Section 1704 (p) amended Internal
Revenue Code Section 162(k) retroactive to 1986. The amendment added an
exception to IRC 162(k) for "amounts that are properly allocated to
indebtedness and amortized over the term of such indebtedness." This
exception should eliminate a substantial portion of the IRS' assessment for
stock redemption - related costs.
If the IRS's proposed adjustments are sustained, the Company would be
liable for additional income taxes of approximately $5.3 million plus interest
through 1993. The Company would have a future tax liability of approximately
$2.9 million for the same issues carrying forward into, as yet, unaudited
years.
Management believes that it has meritorious defenses to the adjustment
proposed by the IRS and that the ultimate liability, if any, resulting from
this matter will have no material effect on the Company's consolidated
financial position. The significance of this matter on the Company's future
operating results depends on the level of future results of operations as well
as on the timing and amount of the ultimate outcome. On December 9, 1994 and
October 6, 1995, the Company filed a protest to the proposed adjustments of
the IRS for the tax years ended June 1988 through June 1993. An informal
initial conference with the Northeast Region office of the Internal Revenue
Service was held on March 6, 1996. As a result of this meeting letters were
issued on April 10, 1996 and April 29, 1996, from the Internal Revenue Service
Appeal Officer requesting additional information on several issues. The
Company responded to the questions relating to the intangible asset valuation
issue on June 28, 1996.
<27>
<PAGE>
The Company is involved in an audit by the Department of Labor ("DOL")
of its Employee Stock Ownership Plan. On June 23,1995, the Department of Labor
issued an audit letter claiming the Company's Employee Stock Ownership Plan
engaged in a prohibited transaction. Essentially, the DOL alleges that Series
C Preferred Stock contributed to the Plan was not a proper investment since it
was neither stock nor a qualified equity as required by ERISA. The Company
has responded to the claim and intends to pursue the matter vigorously as it
believes the Series C Preferred Stock is stock and, therefore, constitutes a
proper investment for the Plan.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board issued SFAS
No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amounts of these assets may not be
recoverable. SFAS No. 121 is effective for the Company's 1997 fiscal year and
is not expected to have a material effect on the Company's consolidated
financial statements upon adoption.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which encourages, but does
not require, companies to adopt the fair value based method of accounting for
stock-based employee compensation plans. Currently, the Company uses the
intrinsic value based method prescribed by Accounting Principles Board Opinion
("APB") No. 25. Companies are also permitted to continue to account for such
transactions under APB No.25, but would be required to disclose on a pro forma
basis net income and, if presented, earnings per share, as if the fair value
based method of accounting had been applied.
The disclosure provisions of SFAS No. 123 are effective for financial
statements for the Company's 1997 fiscal year. Although a final decision has
not been reached, the Company does not expect to change to the fair value
based method, nor has it determined the effect the new standard will have on
net income and earnings per share should the Company elect to make such a
change. Adoption of the new standard will have no effect on the Company's
cash flows.
<28>
<PAGE>
Item 8 Financial Statements and Supplementary Data
<TABLE>
<CAPTION> Page
<S> <C>
Report of Independent Auditors (Deloitte & Touche LLP) F-1
Report of Independent Auditors (Ernst & Young LLP) F-2
Consolidated Balance Sheets as of June 29, 1996 and June 24, 1995 F-3
Consolidated Statements of Operations for the years ended June 29, 1996
June 24, 1995 and June 25, 1994 F-5
Consolidated Statements of Common Stockholders' Deficiency for the
years ended June 29, 1996, June 24, 1995 and June 25, 1994 F-6
Consolidated Statements of Cash Flows for the years ended June 29, 1996,
June 24, 1995 and June 25, 1994 F-8
Notes to Consolidated Financial Statements F-9
</TABLE>
<29>
<PAGE>
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Effective April 29, 1996, the Company, through action of its Audit
Committee, informed its independent auditors, Ernst & Young LLP, of its
dismissal on April 29, 1996. A form 8-K was filed on May 6, 1996.
The reports of Ernst & Young LLP on the consolidated financial
statement for the fiscal years 1995 and 1994 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles.
In connection with the audits of the two fiscal years ending June 25,
1994 and June 24, 1995 and during subsequent interim periods, there were
no disagreements on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope and procedures which, if
not resolved to the satisfaction of Ernst & Young LLP, would have caused
Ernst & Young LLP to make reference to the matter in its report.
The termination of Ernst & Young LLP did not result from any
"disagreement" (as defined above), but reflected the Company's
dissatisfaction with the level of audit fees charged by Ernst & Young LLP
for its services.
On May 9, 1996, Deloitte & Touche LLP was engaged by the Company as
its new accountants.
<30>
<PAGE>
Part III
Item 10 Directors and Executive Officers of the Registrant
The following are the directors and executive officers of the Company
as of June 29, 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Age Position Position Since
Michel Rapoport 54 Chief Executive Officer, 1995
President and Director
Paul F. Jeanmougin 60 CFO, Treasurer and 1986
Assistant Secretary
Sandra J. Sheffer 49 General Counsel and Secretary 1986
William A. Marquard 76 Director 1986
Thomas R. Wall IV 38 Director 1990
Nicholas M. Georgitsis 61 Director 1991
Robert A. Young III 55 Director 1988
</TABLE>
Mr. Rapoport was elected President and Chief Executive Officer in March
1995. Mr. Rapoport was formerly Vice President, Pitney Bowes International
and Chairman, Pitney Bowes France since 1986.
Mr. Jeanmougin has served as Assistant Secretary since 1986, Treasurer
since 1990 and CFO since June 5, 1995.
Ms. Sheffer has served as General Counsel and Secretary of the Company
since 1986.
Mr. Marquard is Chairman of the Board of Arkansas Best Corporation,
primarily engaged, through its motor carrier subsidiaries, in less-than-
truckload shipments of general commodities, Chairman Emeritus of American
Standard Inc. a producer of air conditioning systems, bathroom and kitchen
fixtures, and fittings, and braking systems for heavy trucks and buses, and
Vice Chairman of Kelso, an investment banking firm. He is also a Director of
Americold Corporation, Earle M. Jorgensen Company, and Treadco, Inc.
Mr. Wall has been associated with Kelso since 1983, most recently as
Managing Director. He is also a Director of Lebanon Valley Offset, Inc.,
Mitchell Supreme Fuel Company, Tyler Refrigeration Inc., Club Car, Inc. and
King Broadcasting Corporation.
Mr. Young has been a member of the Board of Directors of the Company
since 1988. Mr. Young has been President since 1973 and Chief Executive
Officer since 1988 of Arkansas Best Corporation, Chief Executive Officer of
Treadco, Inc., a company engaged in tire retreading
<31>
<PAGE>
and commercial truck tire sales, since 1991, and President of ABF Freight
System, Inc., a company which concentrates on long-haul transportation of
general commodities freight, since 1979. He is also Director of Treadco,
Inc., ABF Freight System, Inc. and Arkansas Best Corporation.
Mr. Georgitsis has been a member of the Board of Directors of the
Company since 1991. Mr. Georgitsis has been an independent business
consultant since his retirement from American Standard Inc. in 1992. Since
his retirement he has also provided services for Kelso. Prior to that time,
he was associated with American Standard in various executive positions
since 1979, most recently as Senior Vice President, Transportation Products.
He is also a Director of Tyler Refrigeration Inc. and Treadco, Inc.
<32>
<PAGE>
Item 11 Executive Compensation
The following table discloses compensation paid by the Company for fiscal
years 1996, 1995 and 1994 to its chief executive officer and other executive
officers whose compensation was in excess of $100,000 for fiscal year 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
s> <C> <C> <C>
Fiscal Annual Compensation
Name and Principal Position Year Salary (1) Bonus (2)
($) ($)
Michel Rapoport (4) 1996 $303,334 $75,000
President and 1995 88,654 -0-
Chief Executive Officer
Paul F. Jeanmougin 1996 $ 90,584 $18,933
CFO, Treasurer, 1995 $ 82,617 -0-
and Assistant Secretary 1994 $ 77,772 $23,000
(1) Amounts listed as salary include premiums paid on health and life
insurance policies on the named individuals.
(2) Bonuses are paid to management employees based upon a percentage of
each employee's salary range midpoint. Such percentage varies with
the position of the employee in the Company.
(3) The Company also provides certain incidental benefits, but in neither
case does the aggregate amount of such benefits exceed 10% of the
total annual salary and bonus for the named individuals.
(4) Joined the Company as President and Chief Executive Officer in
March 1995.
</TABLE>
Stock Option Plan
The Company's stock option plan provides for the granting of options to
purchase up to 160,000 shares of common stock. Options are granted with
exercise prices and vesting schedules established by the Stock Option
Committee of the Board of Directors, and expire ten years after grant. To
date, the Company has granted options, with exercise prices of $10.00 per
share, to purchase a total of 65,050 shares of common stock. The Company
did not grant options to officers in fiscal 1996.
<33>
<PAGE>
Fiscal 1996 Year-End Option Values
The following table provides information on the number of common
shares underlying unexercised options held by the executive officers
named on the Summary Compensation Table:
<TABLE>
<CAPTION>
Number of Underlying
Unexercised Value of Unexercised In-The-Money Options at
Options at Fiscal In-The-Money Options at
1996 Year-End Fiscal 1996 Year-End (1)
<S> <C> <C> <C> <C>
Name Exercisable Unexercisable (2) Exercisable Unexercisable
Michel Rapoport -0- -0- -0- -0-
Paul F. Jeanmougin 4200 -0- -0- -0-
</TABLE>
(1) Options are exercisable at $10.00 per share. The Company common stock
has been appraised as of June 30, 1996 at $10.20 per share.
Benefit Plans
Retirement Plan. The Company maintains a non-contributory defined
benefit retirement plan (the "Retirement Plan") for salaried employees,
including executive officers. The Retirement Plan provides retirement
benefits based on credited years of service and average compensation,
comprised solely of the Salary portion of Annual Compensation reported on
the Summary Compensation Table, for the highest five consecutive calendar
years of the final ten calendar years of employment. Service with American
Standard Inc. is included in calculating credit years of service.
On August 31, 1994, the Company froze the Retirement Plan. As a
consequence, the accrual of the benefits for covered employee's ceased on
that date and years of service after that date will not be included in
calculating credited years of service.
Benefits payable pursuant to the plan are reduced by Social Security
Benefits and other benefits payable under the American Standard Inc. plans and
the pension equivalent of benefits provided under the Company's ESOP. The
plan permits lump-sum distributions in lieu of monthly pension payments,
subject to approval by the Administrative Committee of the Board of Directors
in certain cases and, in the case of officers, the additional approval of the
Board of Directors.
As of August 31, 1994, the individuals named in the Summary Compensation
Table have the following years of credited service for purposes of this plan:
Paul Jeanmougin - 36 years, Michel Rapoport - 0 years.
Highest 5-Year Years of Service
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average 5 10 15 20 25 30 35 40
Compensation
$100,000 $7,500 $15,000 $22,500 $30,000 $37,500 $45,000 $52,500 $60,000
$150,000 11,250 22,500 33,750 45,000 56,250 67,500 78,750 90,000
$200,000 15,000 30,000 45,000 60,000 75,000 90,000 105,060 120,000
$250,000 18,750 37,500 56,250 75,000 93,750 112,500 131,250 150,000
$300,000 22,500 45,000 67,500 90,000 112,500 135,000 157,500 180,000
$350,000 26,250 52,500 78,750 105,000 131,250 157,500 183,750 210,000
</TABLE>
<34>
<PAGE>
Employee Stock Ownership Plan. The ESOP is a noncontributory defined
contribution stock bonus plan in which all of the Company's domestic employees
not covered by a collective bargaining agreement are eligible. The ESOP
primarily invests in the Company's Series C Preferred Stock and common stock.
Company contributions are discretionary but will not exceed 15% of aggregate
total compensation to participating employees. The Company has made
contributions to the ESOP in shares of Series C Preferred Stock and in cash,
and prior to the 1990 Transaction made contributions of Class "A" Common
Stock. The ESOP received 225,000 shares of Common Stock as part of the 1990
Transaction and received shares of Series D Preferred Stock in connection with
the 1990 Transaction. Contributions to the ESOP are allocated to individual
accounts in proportion to the participant's compensation and vest over a
seven-year period. No contributions were made to the ESOP by the Company on
behalf of the named individuals included in the Summary Compensation Table.
The Company currently makes cash contributions to the ESOP only to the
extent necessary to fund the cash needs of the ESOP for payments to retired,
terminated and deceased participants and for administrative expenses. The
Company estimates that its cash purchases from ESOP will be approximately $2.0
million in fiscal 1996, in order to fund payments to retired, terminated and
deceased employees. In fiscal 1993, the trustee of the ESOP elected to defer
participant distributions in substantially equal annual payments over a period
of five years in order to minimize cash contributions by the Company to the
ESOP.
Voting rights for shares held by the ESOP are generally exercised by
the Administrative Committee of the Board of Directors except with respect to
certain major proposals, in which case the participants have the right to
exercise voting rights.
Savings Plan. The Company maintains a savings plan under Section 401(k)
of the Internal Revenue Code of 1986 under which designated groups of non-union
employees with one year of service, including all executive officers, may
participate. Under the savings plan, a participant may contribute from 2% to
10% of compensation, which is eligible for 50% matching contributions from the
Company. A participant may contribute over 6% but any excess will not be
matched by the company. On February 1, 1992, the matching contribution was
suspended indefinitely by the Company. Participants became vested in Company
contributions to the extent of 20% after 3 year and thereafter at the rate of
20% per year.
No amounts were deferred pursuant to the savings plan by the named
individuals included in the Summary Compensation Table.
<35>
<PAGE>
Executive Severance Agreement
The Company entered into an employment agreement on February 13, 1996,
with Michel Rapoport, President and Chief Executive Officer of the Company as
of March 15, 1996. Pursuant to the agreement, prior to July 1, 1998, if
Mr. Rapoport's employment is terminated because of his death, disability,
change in control of the company or is terminated without cause, he will
receive one year's salary, the annual bonus he would have been entitled to
receive for the fiscal year in which he terminated and the portion of the
long term incentive compensation attributable to the period employed by the
Company.
Director Compensation
The Company pays an annual retainer plus a per meeting fee to those
directors who are not employees of the Company or Kelso. Currently, the
Company pays an annual retainer of $15,000 plus $500 per day for each
directors' meeting attended. The Company also reimburses such persons for
travel and incidental expenses incurred in connection with attending
directors' meetings. Employees of the Company and Kelso do not receive any
additional compensation for serving as director.
The Compensation Committee of the Board of Directors (the "Committee")
is composed of three independent, outside directors. The members of the
Committee for fiscal 1996 were Messrs. Georgitsis, Marquard and Wall. The
Committee has the overall responsibility of reviewing and recommending
specific compensation levels for executive officers to the full Board of
Directors. The Committee also receives and reports to the Board on Company
programs for developing senor management personnel. Compensation decisions
for fiscal 1996 followed the same pattern as fiscal 1995.
The performance incentive compensation, which is paid out in the form
of an annual cash bonus, was established by the Committee to provide a direct
financial incentive to achieve corporate and operating goals. At the
beginning of each fiscal year, the Committee establishes a target bonus for
executive officers based on individual performance goals and on Company
performance.
<36>
<PAGE>
Item 12 Security Ownership of Certain Beneficial Owners and Management
The following table presents certain information concerning ownership
of equity securities of the Company as of August 1, 1996 by (i) Directors, (ii)
Executive Officers named in the Summary Compensation Table, (iii) all Directors
and Executive Officers as a group and (iv) all persons known by the Company to
beneficially own more than 5% of each class.
<TABLE>
<CAPTION>
Series C Series D
Common Stock Preferred Stock Preferred Stock
<S> <C> <C> <C> <C> <C> <C>
Shares Shares Shares
Beneficially Percent Beneficially Percent Beneficially Percent
Owned (a) of Class Owned of Class Owned of Class
Name
Michel Rapoport -0- * -0- *
William A. Marquard 15,000 *
Nicolas M. Georgitsis 2,000 *
Robert A. Young III 5,000 *
Thomas R. Wall IV(b) 1,400,000 65.0% 126,208 64.0%
Paul F. Jeanmougin 18,950 * 340 *
Directors and
Executive Officers as
a Group (7 persons) 1,445,700 66.0% 126,866 64.4%
Kelso Investment
Associates II, L.P. 85,000 43.1%
Kelso Mosler Partners, L.P. 41,208 20.9%
Kelso Investment Assoc. IV, L.P. 1,330,000 61.8%
Kelso Equity Partners II, L.P. 70,000 3.2%
Joseph S.Schuchert(b) 1,400,000 65.0% 126,208 64.0%
Frank T. Nickell (b) 1,400,000 65.0% 126,208 64.0%
George E.Matelich (b) 1,400,000 65.0% 126,208 64.0%
BancBoston
Capital Inc. 13,784 7.0%
Mosler Inc. Employee
Stock Ownership Plan 197,152 9.0% 297,749 100% 8,462.4 4.3%
</TABLE>
* Less than 1%
(a) Beneficial ownership includes shares of common stock which may be acquired
pursuant to currently exercisable options or options which become
exercisable within sixty (60) days and include shares of common stock held
in the Employee's Savings Plan.
(b) Messrs. Schuchert, Nickell, Matelich and Wall may be deemed to share
beneficial ownership of shares of Company common stock and Series D
Preferred Stock owned of record by Kelso Investment Associates II, L.P.,
Kelso Mosler Partners, L.P., Kelso Investment Associates IV, L.P. and
Kelso Equity Partners II by virtue of their status as general partners of
such partnerships. Messrs. Schuchert, Nickell, Matelich and Wall share
investment and voting power with respect to securities owned by the
Kelso affiliates.
The address of Mr. Marquard is 1114 Avenue of the Americas, New York,
New York 10022. The address of Mr. Georgitsis is 736 Lake Avenue, Greenwich,
Connecticut 06830. The address of Mr. Young is 1000 South 21st Street, Fort
Smith, Arkansas 72901. The address of Mr. Wall and the Kelso entities is 350
Park Avenue, New York, New York 10022. The address of all other persons
listed above is 8509 Berk Boulevard, Hamilton, Ohio 45012.
<37>
<PAGE>
Item 13 Certain Relationship and Related Transactions.
From time to time the Company has had transactions with its directors,
executive officers and principal shareholders. The Company believes that
these transactions have been on terms no less favorable to the Company than
could have been obtained from an unaffiliated third party. The Company has
adopted a policy that all transactions with affiliates, including directors
and shareholders owning more than 5% of the common stock, will be on terms no
less favorable to the Company than could be obtained from an unaffiliated
third party and must be approved by a majority of the disinterested
independent directors. The Company is party to a management agreement with
Kelso pursuant to which Kelso has been paid fees of $200,000 in each of the
last three fiscal years. This continuing agreement was approved by all
directors including the disinterested directors.
<38>
<PAGE>
PART IV
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
<TABLE>
<CAPTION>
<S> <C>
Page
1. Financial Statements are included in pages F1-F23 F1-F25
2. Schedule II - Valuation and Qualifying Accounts S-1
</TABLE>
All other schedules have been omitted as they are not applicable, not
required, or the information required thereby is set forth in the financial
statements or the notes thereto.
<TABLE>
<CAPTION>
<S> <C>
3. Exhibits
Description
***3.1 Certificate of Incorporation, as amended of Mosler.
*3.2 By-laws of Mosler.
***3.3 Certificate of Incorporation, as amended of Security
Control Systems, Inc.
***3.4 By-laws of Security Control Systems, Inc.
***4 Indenture for 11% Series A Senior Notes due 2003
and 11% Senior Notes due 2003 dated as of July 29, 1993.
****10.1 Credit Agreement September 1, 1995
***10.2 1990 Stock Option Plan.
*10.3 Employee Stock Ownership Plan, dated June 1, 1987.
*10.4 Amendment No. 1 to Employee Stock Ownership Plan,
dated December 6, 1988
***10.5 Mosler Employee's Savings Plan and Trust, Amended
and Restated through July 1, 1992.
***10.6 Securities Purchase Agreement by and between each of the
Common Shareholders of Security Control Systems, Inc.,
as Sellers and Mosler Inc. as Purchaser with Respect to
the Acquisition of Security Control Systems, Inc.
***10.9 Securities Purchase Agreement by and between El Dorado
Ventures, a California Limited Partnership, and Mosler,
Inc. as Purchaser with Respect to the Acquisition of
Security Control Systems, Inc. dated July 21, 1993.
</TABLE>
<39>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
**10.10 Agreement of Sale and Purchase, The Security Products
Division of American Standard Inc., including the Mosler
Safe Company, a subsidiary of American Standard, Inc.
*10.11 Agreement and Plan of Merger and Plan of Reorganization
between Kelso Mosler Acquisition, Inc. and Mosler Inc.
dated May 1, 1990
16 Letter on change in certifying accountant
21 Subsidizing of the Registrant
27.0 Financial Data Schedule
</TABLE>
* Incorporated by reference to the exhibits to Securities Act of 1933
Form S-18 Registration No. 33-36426
** Incorporated by reference to the exhibits to Securities Act of 1933
Form S-1 Registration No. 33-5184
*** Incorporated by reference to the exhibits to Securities Act of 1933
Form S-1 Registration No. 33-67908
**** Incorporated by reference to June 24, 1995 Form 10-K
(b) Reports on Form 8-K
Two Forms 8-K were filed in the fourth quarter, one to reflect the
termination of Ernst & Young LLP filed May 6, 1996, and one to
reflect the appointment of Deloitte & Touche LLP, filed May 14, 1996.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
1. THE REGISTRANT DID NOT SEND AN ANNUAL REPORT TO ITS SECURITY
HOLDERS FOR FISCAL 1996
<40>
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
MOSLER INC.
(In Thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balance at Charged to Deductions Balance
Beginning Costs and Other At End
Description of Period Expenses Accounts(1) of Period
Year ended June 29, 1996
Allowance for doubtful accounts 1,158 432 (597) 993
Year ended June 24, 1995
Allowance for doubtful accounts 1,158 463 (463) 1,158
Year ended June 25, 1994
Allowance for doubtful accounts 1,003 475 (320) 1,158
<FN>
(1) Represents amounts charged against the allowance net of recoveries.
S-1
</FN>
</TABLE>
<41>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Mosler Inc.
Dated: September 25, 1996 By: /S/ Michel Rapoport
Michel Rapoport
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
/S/Michel Rapoport President and September 21,1996
Michel Rapoport Chief Executive Officer
(Principal Executive Officer)
/S/Paul F. Jeanmougin Chief Financial Officer and September 21,1996
Paul F. Jeanmougin Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
/S/Nicolas M. Georgitsis Director September 21, 1996
Nicolas M. Georgitsis
/S/William A. Marquard Director September 21, 1996
William A. Marquard
/S/Thomas R. Wall IV Director September 21, 1996
Thomas R. Wall IV
/S/Robert A. Young III Director September 21, 1996
Robert A. Young III
</TABLE>
Please address all correspondence to:
Mosler Inc.
Mr. Paul F. Jeanmougin
8509 Berk Blvd.
Hamilton, OH 45015-2213
<42>
<PAGE>
MOSLER INC.
Consolidated Financial
Statements for the Years Ended June 29, 1996, June 24, 1995 and
June 25, 1994 and Independent Auditors' Report
<PAGE>
MOSLER INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 29, 1996,
JUNE 24, 1995 AND JUNE 25, 1994:
Consolidated Balance Sheets F 3
Consolidated Statements of Operations F 5
Consolidated Statements of Common Stockholders' Deficiency F 6
Consolidated Statements of Cash Flows F 8
Notes to Consolidated Financial Statements F 9
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mosler Inc.
We have audited the accompanying consolidated balance sheet of Mosler Inc. and
its subsidiaries as of June 29, 1996 and the related consolidated statements
of operations, common stockholders' deficiency and cash flows for the year
ended June 29, 1996. Our audit also included the financial statement schedule
listed in the Index at Item 14(a) for the year ended June 29, 1996. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Mosler Inc. and its subsidiaries
at June 29, 1996 and the consolidated results of their operations and their
cash flows for the year ended June 29, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 16 to the consolidated financial statements, the Company
is currently undergoing an audit of its federal income tax returns for the
years 1988 through 1993. The ultimate outcome of the IRS audit cannot
presently be determined. Accordingly, no provision for any liability that may
result has been made in the consolidated financial statements.
September 12, 1996
Cincinnati, Ohio
/S/Deloitte & Touche LLP
<F1>
<PAGE>
Report of Independent Auditors
The Board of Directors
Mosler Inc.
We have audited the accompanying consolidated balance sheet of Mosler Inc. as
of June 24, 1995, and the related consolidated statements of operations,
common stockholders' deficiency and cash flows for each of the two years in
the period ended June 24, 1995. Our audits also included the information
relating to the years ended June 25, 1994 and June 24, 1995 reported on the
financial statement schedule listed in the Index at Item 14 (a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by managment, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mosler Inc. at
June 24, 1995 and the consolidated results of its operations and its cash
flows for each of the two years in the period ended June 24, 1995, in
conformity with generally accepted accounting principles. Also, in our
opinion, the information related to the years ended June 25, 1994 and
June 24, 1995 on the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, present
fairly in all material respects the information set forth therein.
As discussed in Note 16 to the consolidated financial statements, the Company
is currently undergoing an audit of its federal income tax returns for the
years 1988 through 1991. The ultimate outcome of the IRS audit cannot
presently be determined. Accordingly, no provision for any liability that
may result has been made in the consolidated financial statements.
As discussed in Notes 9 and 10 to the consolidated financial statments, in
1994 the Company changed its method of accounting for income taxes and
postretirement benefits other than pensions.
September 8, 1995
/S/Ernst & Young LLP
<F2>
<PAGE>
MOSLER INC.
CONSOLIDATED BALANACE SHEETS
JUNE 29, 1996 AND JUNE 24, 1995 (In Thousands of Dollars except Share Data)
<TABLE>
<CAPTION>
<S> <C> <C>
June 29, June 24,
1996 1995
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ $ 4,359
Accounts receivable 54,172 46,002
Inventories 13,528 17,165
Other current assets 575 530
Total current assets 68,275 68,056
FACILITIES:
Land and land improvements 1,146 1,223
Buildings 7,853 8,168
Machinery and equipment 34,257 42,103
Improvements in progress 1,236 454
Gross facilities 44,492 51,948
Less accumulated depreciation 33,091 41,495
Net facilities 11,401 10,453
OTHER ASSETS:
Service agreements (net of accumulated amortization
of $45,190 at June 29, 1996 and $40,677 at June 24,
1995) 18,049 22,562
Deferred debt issuance costs (net of accumulated
amortization of $4,858 at June 29, 1996 and $4,289
at June 24, 1995) 3,853 4,559
Goodwill (net of accumulated amortization of $4,716
at June 29, 1996 and $3,236 at June 24, 1995) 6,057 7,537
Intangible pension asset 291 876
Other 1,199 488
TOTAL $109,125 $114,531
</TABLE>
<F3>
<PAGE>
MOSLER INC.
CONSOLIDATED BALANCE SHEETS
JUNE 29, 1996 AND JUNE 24, 1995 (In Thousands of Dollars Except Share Data)
LIABILITIES, REDEEMABLE STOCK AND COMMON STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
<S> <C> <C>
June 29 June 24
1996 1995
CURRENT LIABILITIES:
Accounts payable $ 9,923 $ 9,390
Accrued liabilities:
Compensation and payroll taxes 3,101 5,020
Product warranty 1,240 1,689
Accrued workers' compensation 5,011 5,500
Accrued interest 5,962 5,825
Other 8,988 8,370
Unearned revenue 13,366 13,786
Income taxes payable 299 358
Current portion of long-term debt 1,000 750
Total current liabilities 48,890 50,688
OTHER LIABILITIES:
Long-term debt 132,948 129,802
Postretirement healthcare benefits 10,812 11,975
Pension liability 1,604 2,385
Total other liabilities 145,364 144,162
REDEEMABLE STOCK:
Series D increasing rate preferred stock 40,302 34,399
Series C adjustable rate preferred stock 35,424 31,900
Common stock 2,011 2,004
Total redeemable stock 77,737 68,303
COMMON STOCKHOLDERS' DEFICIENCY:
Common stock, $.10 par value; 4,000,000 shares
authorized, 2,540,179 shares issued 254 254
Accumulated deficit (155,640) (141,397)
Excess of additional pension liability over
unrecognized prior service cost (546) (1,509)
Redemption value of common stock held by ESOP (2,011) (2,004)
Foreign currency translation adjustments (1,123) (927)
Total (159,066) (145,583)
Less treasury stock, at cost (381,888 shares at
June 29, 1996 and 298,365 at June 24, 1995) (3,800) (3,039)
Total common stockholders' deficiency (162,866) (148,622)
TOTAL $109,125 $114,531
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<F4>
<PAGE>
MOSLER INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 29, 1996, JUNE 24, 1995 AND JUNE 25, 1994
(In Thousands of Dollars Except Share Data)
<TABLE>
Year Ended
<CAPTION>
<S> <C> <C> <C>
June 29, June 24, June 25,
1996 1995 1994
NET SALES:
Service $106,901 $108,307 $107,268
Products 111,359 108,606 107,183
218,260 216,913 214,451
COST OF SALES:
Service 77,957 77,709 78,016
Products 88,190 87,502 89,480
Restructuring 2,989
169,136 165,211 167,496
Gross profit 49,124 51,702 46,955
SELLING AND ADMINISTRATIVE EXPENSES (36,493) (37,915) (36,689)
OTHER INCOME (EXPENSE) 254 11 (413)
OPERATING INCOME 12,885 13,798 7,853
DEBT EXPENSE:
Interest expense 17,526 16,477 16,696
Amortization of debt discount and expense 876 732 797
Interest income (135) (188) (295)
Total 18,267 17,021 17,198
LOSS BEFORE INCOME TAXES, EXTRAORDINARY ITEM
AND CUMULATIVE EFFECT FOR ACCOUNTING CHANGE (5,382) (3,223) (9,345)
PROVISION FOR INCOME TAXES 65 59 336
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (5,447) (3,282) (9,681)
EXTRAORDINARY ITEM - LOSS RELATED TO EARLY
RETIREMENT OF DEBT - - (3,054)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
POSTRETIREMENT BENEFITS - - (10,300)
NET LOSS (5,447) (3,282) (23,035)
PREFERRED DIVIDENDS (7,819) (7,540) (5,908)
AMORTIZATION OF PREFERRED STOCK DISCOUNT (977) (745) (614)
(8,796) (8,285) (6,522)
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(14,243) $(11,567) $(29,557)
PER COMMON SHARE:
Loss before extraordinary item and
cumulative effect of accounting change $ (6.51) $ (5.01) $ (6.87)
Extraordinary item - loss related to
early retirement of debt - - (1.29)
Cumulative effect of change in accounting
for postretirment benefits - - (4.36)
Net loss applicable to common stockholders $ (6.51) $ (5.01) $ (12.52)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,189,010 2,308,267 2,362,380
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<F5>
<PAGE>
MOSLER INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' DEFICIENCY
YEARS ENDED JUNE 29, 1996, JUNE 24, 1995 AND JUNE 25, 1994
(In Thousands of Dollars Except Share Data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Redemption
Common Value of Foreign
Stock Additional Common Currency
$.10 Par Paid-in Accumulated Pension Stock Held Translation Treasury
Value Capital Deficit Liability by ESOP Adjustments Stock Total
BALANCE AT JUNE 26, 1993 $ 254 $ 693 $ (100,966) $ (2,554) $ (3,858) $ (70) $(1,689) $(108,190)
Net Loss (23,035) (23,035)
Foreign currency translation
adjustment 111 111
Issuance of 3,925 shares of
common stock 39 39
Purchase of 35,957 shares of
common stock (474) (474)
Dividends on Series C preferred
stock ($13.56 per share) (3,344) (3,344)
Dividends on Series D preferred
stock ($13.00 per share) (572) (1,992) (2,564)
Amortization of discount on
Series D preferred stock (121) (493) (614)
Reduction in charge in
connection with recognizing
minimum pension liability 1,109 1,109
Net decrease in redemption
value of common stock
held by ESOP 2,002 2,002
BALANCE AT JUNE 25, 1994 $ 254 $ 0 $ (129,830) $ (1,445) $ (1,856) $ 41 $(2,124) $(134,960)
</TABLE>
<F6>
<PAGE>
MOSLER INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS'DEFICIENCY (continued)
YEARS ENDED JUNE 29, 1996, JUNE 24, 1995 AND JUNE 25, 1994
(In Thousands of Dollars Except Share Data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Redemption
Common Value of Foreign
Stock Additional Common Currency
$.10 Par Paid-in Accumulated Pension Stock Held Translation Treasury
Value Capital Deficit Liability by ESOP Adjustments Stock Total
BALANCE AT JUNE 25, 1994 $ 254 $ 0 $ (129,830) $ (1,445) $ (1,856) $ 41 $(2,124) $(134,960)
Net Loss (3,282) (3,282)
Foreign currency translation
adjustment (968) (968)
Purchase of 105,554 shares of
common stock (915) (915)
Dividends on Series C preferred
stock ($18.37 per share) (4,996) (4,996)
Dividends on Series D preferred
stock ($13.00 per share) (2,544) (2,544)
Amortization of discount on
Series D preferred stock (745) (745)
Charge in connection with
recognizing minimum pension
liability (64) (64)
Net decrease in redemption
value of common stock
held by ESOP (148) (148)
BALANCE AT JUNE 24, 1995 $ 254 $ 0 $ (141,397) $ (1,509) $ (2,004) $ (927) $(3,039) $(148,622)
Net Loss (5,447) (5,447)
Foreign currency translation
adjustment (196) (196)
Purchase of 83,523 shares of
common stock (761) (761)
Dividends on Series C preferred
stock ($17.70 per share) (5,275) (5,275)
Dividends on Series D preferred
stock ($13.00 per share) (2,544) (2,544)
Amortization of discount on
Series D preferred stock (977) (977)
Reduction in connection with
recognizing minimum pension
liability 963 963
Net decrease in redemption
value of common stock
held by ESOP 112 112
BALANCE AT JUNE 29, 1996 $ 254 $ 0 $ (155,640) $ (546) $ (1,892) $ (1,123) $(3,800) $(162,747)
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<F7>
<PAGE>
MOSLER INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 29, 1996, JUNE 24, 1995 AND JUNE 25, 1994
(In Thousands of Dollars)
<TABLE>
Year Ended
<CAPTION>
<S> <C> <C> <C>
June 29, June 24, June 25,
1996 1995 1994
OPERATING ACTIVITIES:
Net loss $ (5,447) $ (3,282) $ (23,035)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Cumulative effect of accounting change 10,300
Loss related to early retirement of debt 3,054
Depreciation 2,490 2,561 4,673
Amortization 6,562 6,782 6,767
Loss (gain) on disposal of facilities (96) (74) 204
Provision for doubtful accounts 432 463 475
Interest paid in shares of preferred stock 2,792 2,207 1,515
Decrease (increase) in:
Accounts receivable (8,720) (1,499) (4,115)
Inventories 3,503 323 (1,884)
Other current assets (53) 107 1,037
Increase (decrease) in:
Accounts payable 579 (1,556) 736
Accrued liabilities (3,052) 830 5,098
Unearned revenue (421) (413) (341)
Income taxes payable (57) (343) 141
Net cash (used in) provided by
operating activities (1,488) 6,106 4,625
INVESTING ACTIVITIES:
Proceeds from sale of facilities and
equipment 1,499 88 1,067
Acquisition of Linx (6,140)
Capital expenditures (4,845) (1,182) (1,776)
Decrease (increase) in other assets 178 122 (765)
Net cash used in investing activities (3,168) (972) (7,614)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 39
Purchase of common stock (761) (915) (474)
Purchase of Series C preferred stock (2,095) (1,297) (444)
Purchase to Series D preferred stock (66) (60) (22)
Net proceeds from revolving line of credit 4,146 7,500 5,100
Proceeds from issuance of long-term debt 115,000
Principal payments on long-term debt (750) (8,598) (113,212)
Deferred debt issuance costs (170) (5,241)
Payment of debt assumed in acquisition (1,603)
Net cash provided by (used in)
financing activities 304 (3,370) (857)
EFFECT OF EXCHANGE RATE CHANGES ON CASH (7) (256) 258
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (4,359) 1,508 (3,588)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 4,359 2,851 6,439
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 0 $ 4,359 $ 2,851
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<F8>
<PAGE>
MOSLER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 29, 1996, JUNE 24, 1995, AND JUNE 25, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Principles of Consolidation - The accompanying consolidated
financial statements include the accounts of Mosler Inc. and its wholly-owned
subsidiaries (the Company). The Company's investments in less than majority-
owned entities, which are not material, are included in the accompanying
financial statements on the equity method of accounting. All significant
intercompany balances and transactions have been eliminated in consolidation.
Kelso Investment Associates IV, L.P. (Kelso) is the majority owner of the
Company. In the years ended June 29, 1996, June 24, 1995, and June 25, 1994,
the Company paid an affiliate of Kelso an annual management fee of $200,000
for each of the last three fiscal years in exchange for general corporate,
financial and administrative advice.
Business Description-The Company is a major provider and servicer of security
systems and products. The Company manufactures, markets, installs and
services security systems and products used by financial institutions and
other commercial and industrial entities through its operations in Hamilton,
Ohio, Franklinville, N.Y., Wayne, N.J., and Mexico City, Mexico.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management of the Company
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Translation of Foreign Currency Financial Statements - Assets and
liabilities of the Company's foreign subsidiaries are translated at balance
sheet date rates of exchange, and the statements of operations are translated
at the average rates of exchange for the period. Translation adjustments are
reflected as a separate component of common stockholders' deficiency.
Inventories - The Company's inventories are stated at the lower of cost
(determined using the first-in, first-out method) or market.
Facilities and Depreciation - Facilities are stated at cost, including
interest incurred during construction which is not material during any of
the periods. Depreciation is provided on the straight-line method over the
estimated useful lives of the respective assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Land improvement 20 years
Buildings 20 to 40 years
Machinery and equipment 4 to 15 years
</TABLE>
Intangibles - Cost allocated to service agreements at the date of acquisition
are carried at cost and are amortized over the 14 year estimated life of the
contracts using the straight-line method. Goodwill is amortized on the
straight-line method over periods of 5, 10 and 40 years.
<F9>
<PAGE>
The carrying value of service agreements and goodwill is evaluated periodically
as events and circumstances indicate a possible inability to recover its
carrying amount. In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
For The Impairment Of Long-Lived Assets And For Long-Lived Assets To Be
Disposed Of," which requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts of these assets may not be
recoverable. SFAS No. 121 is effective for the Company's 1997 fiscal year and
is not expected to have a material effect on the Company's Consolidated
Financial Statements upon adoption.
Deferred debt issuance costs are amortized over the term of the related debt
using the interest method.
Product Warranty - The Company provides for estimated product warranty costs
at the time of sale.
Revenue Recognition - Except for certain long-term contracts, revenue from the
sale of manufactured products, after provision for installation, is recognized
when material to be installed for customer orders is shipped from the plants.
Revenue on certain long-term contracts is recognized on the percentage-of-
completion method.
Service revenues are recognized on the straight-line method over the
contractual period or as the services are performed.
Advertising - Advertising costs, included in selling and administrative
expense, are charged to expense as incurred and totaled $1,074,000, $545,000,
and $808,000 for the years ended June 29, 1996, June 24, 1995, and June 25,
1994, respectively.
Research and Development - Research and development costs, included in
selling and administrative expenses, are expensed as incurred and amounted to
$2,653,000, $2,884,000 and $3,613,000 for the years ended June 29, 1996,
June 24, 1995 and June 25, 1994, respectively.
Net Loss Per Common Share - Net loss per common share is computed by
dividing net loss applicable to common stockholders by the weighted average
number of common shares outstanding during the period.
Stock Options - In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting For Stock-Based Compensation," which
encourages, but does not require, companies to adopt the fair value based
method of accounting for stock-based employee compensation plans. Currently,
the Company uses the intrinsic value based method prescribed by APB No. 25.
Companies are also permitted to continue to account for such transactions
under APB No. 25, but would be required to disclose on a pro forma basis, net
income and, if presented, earnings per share, as if the fair value based
method of accounting had been applied.
The disclosure provisions of SFAS No. 123 are effective for financial
statements for the Company's 1997 fiscal year. Although a final decision has
not been reached, the Company does not expect to change to the fair value
based method, nor has it determined the effect the new standard will have on
net income and earnings per share should it elect to make such a change.
Adoption of the new standard will not have an effect on the Company's cash
flows.
Cash Flows - For purposes of the consolidated statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
<F10>
<PAGE>
Reporting Period - The Company's fiscal year ends on the last Saturday in
June. Fiscal years 1994 and 1995 each contained 52 weeks. Fiscal year 1996
contained 53 weeks.
Restructuring - During 1996, the Company recorded restructuring charges of
$2,989,000 ($1.37 per share) to close the Hamilton, Ohio plant. The
restructuring charges were comprised of termination benefits of $1,764,000 for
approximately 140 employees and other associated exit costs, substantially all
of which had been paid at June 29, 1996, and an accrual for plant disposal of
$1.6 million. In connection with the plant closing, the Company also recorded
a net gain of approximately $1.6 million for the curtailment of certain
pension and post-retirement health care benefit liabilities (Note 10). In
addition, included in products cost of sale for 1996 are charges of
approximately $.5 million for the relocation of equipment, inventory and
personnel and related travel expenses associated with the plant closure.
Acquisition - On July 29, 1993, the Company acquired all the outstanding
common and preferred stock of Security Control Systems, Inc. (dba LINX
Technologies, Inc.)(Linx) for $6.1 million in cash plus the assumption of
certain liabilities and other direct costs of the acquisition. The
acquisition has been accounted for under the purchase method and, accordingly,
the results of operations of Linx have been included in the consolidated
statement of operations since the date of acquisition. Linx is a developer of
micro-computer based access control systems. The pro-forma effects of this
acquisition were not material.
Reclassifications - Certain reclassifications have been made to the financial
statements for prior years to conform to the current year classification.
2. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
June 29, June 24,
1996 1995
(in thousands)
Billed $ 34,233 $ 33,388
Accrued and unbilled 20,932 13,772
Total 55,165 47,160
Less allowance for doubtful accounts (993) (1,158)
Net accounts receivable $ 54,172 $ 46,002
</TABLE>
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. At June 29, 1996 and
June 24, 1995, accounts receivable from customers in the financial
institutions industry were approximately 70% of total receivables. Progress
payments are generally required and receivables generally are due within 30
days. Credit losses consistently have been within management's expectations.
Unbilled amounts are due upon installation or acceptable completion of the
contracts which normally does not extend beyond one year.
<F11>
<PAGE>
3. INVENTORIES
The components of inventories are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
June 29, June 24,
1996 1995
(in thousands)
Finished products and service parts $ 10,096 $ 11,725
Products in process 4,251 3,500
Raw materials 1,318 5,182
Less allowance for slow moving and
obsolete inventory (2,137) (3,242)
Total $ 13,528 $ 17,165
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
June 29, June 24,
1996 1995
(in thousands)
Amounts payable to banks $ 18,948 $ 15,552
11% Series A Senior Notes 115,000 115,000
Total 133,948 130,552
Less current portion 1,000 750
Total $132,948 $129,802
</TABLE>
On September 1, 1995, the Company established a $29.5 million credit facility,
comprised of a $25.5 million revolving line of credit and term loans up to an
aggregate principal amount of $4.0 million. The agreement also provides for a
$10.0 million letter of credit subfacility of the revolving line of credit.
Borrowings under the credit facility bear interest at the prime lending rate
plus .5% or LIBOR plus 3.0% (8.75% at June 29, 1996). In conjunction with the
credit facility, the Company pays a monthly commitment fee of 1/2 of 1% per
annum on the average daily unused portion of the commitment. The borrowings
against the new credit facility were used to retire the existing amounts
payable to banks. After factoring in approximately $3.2 million letters of
credit issued against the credit facility, the Company has approximately $7.4
million of available borrowing capacity against this facility at June 29, 1996.
On July 29, 1993, the Company completed a refinancing transaction whereby
it issued $115 million principal amount of 11% Series A Senior Notes due
April 15, 2003 (Notes). A portion of the net proceeds from the notes were
deposited in trust to redeem all of the Company's 13 5/8% Senior Subordinated
Debentures ($80 million) plus accrued and unpaid interest. In connection with
the refinancing transaction, the Company wrote off deferred debt issuance
costs and debt discount in the amount of $3.1 million as an extraordinary
item resulting from the early extinguishment of debt.
The line of credit and term loans are secured by substantially all the assets
of the Company. The Notes are senior unsecured obligations of the Company
and rank pari passu with all other senior indebtedness of
<F12>
<PAGE>
the Company. The terms of debt agreements covering the line of credit, term
loans and the Notes provide, among other things, restrictions on the
redemption of the Company's common and preferred stock, additional
indebtedness, lease commitments and capital expenditures and provide that the
Company meet certain financial covenants including maintaining a minimum fixed
charge coverage ratio, interest expense coverage ratio, minimum turnover
ratios, maximum ratio of total consolidated liabilities to consolidated
tangible net worth and minimum earnings before interest, taxes, depreciation
and amortization. The terms of the debt agreement prohibit the Company from
declaring or paying dividends (other than dividends payable solely in shares
of capital stock of the Company), except the Company may pay cash dividends
on the preferred stock limited to retained excess cash flow (as defined) not
to exceed $1,000,000 in any fiscal year. To the extent prior year dividends
are less than $1,000,000, such difference may be used for dividends in
subsequent years. The Company is also prohibited from paying more than
$700,000 (plus cash proceeds from the sale of capital stock) in any fiscal
year to purchase, redeem or retire shares of capital stock of the Company.
To the extent prior year redemptions are less than $700,000, such difference
may be used for repurchase in subsequent years. In addition to the permitted
repurchases of capital stock described above, the Company may repurchase
capital stock distributed from the ESOP to terminated or retired employees in
amounts not to exceed $3,200,000 in fiscal year 1997 and for each fiscal
year, thereafter. Additionally, the agreements prohibit the sale of certain
assets, merger, or consolidation without the banking group's prior waiver of
the related covenant. The Company was not in compliance with the financial
covenants related to its line of credit and term loan and has obtained a
waiver on such covenants for a period of one year from the date of the most
recent balance sheet.
Annual contractual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
Amount in
Thousands
1997 $ 1,000
1998 1,000
1999 16,948
2003 115,000
</TABLE>
Given the variable nature of the Company's line of credit and term loans and
considering comparable agency ratings for similar debt issuances, its carrying
value is a reasonable estimate of its fair value. Based on market quotations,
the fair value of the Company's 11% Series A Senior Notes was $94,875,000 at
June 29, 1996.
5. PREFERRED STOCK
The Company has authorized 2,000,000 shares of $.01 par value preferred stock.
Of the 2,000,000 shares, 400,000 have been designated Series C adjustable rate
cumulative preferred stock and 210,000 have been designated Series D
increasing rate preferred stock as described in Notes 6 and 7. The remaining
1,390,000 shares may be issued with rights and preferences as may be
determined by the Board of Directors of the Company.
<F13>
<PAGE>
6. SERIES D INCREASING RATE PREFERRED STOCK
Series D increasing rate preferred stock consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
June 29, June 24,
1996 1995
(in thousands)
Series D increasing rate preferred stock,
$.01 par value, 210,000 shares authorized
196,238 shares issued in 1996 and 196,794
in 1995, net of unamortized discount of
$2.1 million in 1996 and $3.1 million in
1995, $100 per share liquidation preference,
aggregating $19.6 million and $19.7 million
in 1996 and 1995, respectively $ 17,547 $ 16,636
Unpaid dividends on Series D increasing rate
redeemable preferred stock, $115.80 per
share in 1996 and $90.25 per share in 1995 22,755 17,763
Total $ 40,302 $ 34,399
</TABLE>
The holders of the shares of Series D preferred stock are entitled to receive
cumulative dividends semi-annually at the rate of 13% per annum, increasing on
July 1, 1996 to 14.5%, on July 1, 1997 to 16%, on July 1, 1998 to 17.5%, on
July 1, 1999 to 19%, and on July 1, 2000 to 20.5%. Any dividend periods for
which cash dividends are not paid due to the restrictions in the debt
agreements described in Note 4 will accumulate and accrue additional dividends
(at 12.5% for the year ended June 29, 1996) until the total is paid in full.
For financial reporting purposes, such additional dividends are recorded as
interest expense. Unpaid dividends, including the additional dividends, are
classified as non-current since restrictions imposed by the debt agreements
would prohibit payment within the next twelve months. Except in certain
defined situations, the preferred stock is non-voting.
Subject to limitations imposed by the debt agreements, the Series D preferred
stock is redeemable at the option of the Company, in whole or in part at any
time. The redemption price is $100 per share. The preferred stock is subject
to mandatory redemption in full at $100 per share subject to any restrictions
under debt agreements, on the occurrence of a change of control of the
Company resulting in the Company's present largest shareholder owning less
than 30% of the common stock of the Company.
Holders of the Series D preferred stock, together with holders of the Series
C preferred stock, will be entitled to a preference as to dividends and
redemptions and upon the liquidation of the Company. There are also certain
restrictions against the (1) declaration or payment of dividends (other than
dividends payable solely in capital stock) on capital stock other than the
preferred stock or (2) the purchase, redemption, or retirement of any shares
of the capital stock other than the preferred stock, as more fully described
in Note 4.
The carrying value of the Series D Preferred Stock represents the redemption
value less unamortized discount. The discount is being amortized to produce
a constant effective dividend cost of 20.5% on the carrying value.
In connection with retirements and terminations, the Company from time to
time repurchased shares of Series D preferred stock which had been issued to
the ESOP.
<F14>
<PAGE>
Changes in Series D Preferred Stock are as follows:
<TABLE>
<CAPTION>
<S> <C>
Amount in
Thousands
Balance at June 26, 1993 $ 24,798
Purchase of 175 share of Series D preferred stock (22)
Dividends on Series D preferred stock 2,564
Amortization of discount on Series D preferred stock 614
Additional dividends on unpaid dividends 1,346
Balance at June 25, 1994 29,300
Purchase of 404 shares of Series D preferred stock (49)
Dividends on Series D preferred stock 2,544
Amortization of discount on Series D preferred stock 745
Additional dividends on unpaid dividends 1,859
Balance at June 24, 1995 34,399
Purchase of 556 shares of Sseries D preferred stock (66)
Dividends on Series D preferred stock 2,544
Amortization of discount on Series D preferred stock 977
Additional dividends on unpaid dividends 2,448
Balance at June 29, 1996 $ 40,302
</TABLE>
7. SERIES C ADJUSTABLE RATE PREFERRED STOCK
<TABLE>
<CAPTION>
<S> <C> <C>
June 29, June 24,
1996 1995
(in thousands)
Series C adjustable rate cumulative preferred
stock, $.01 par value, 400,000 shares
authorized, 354,237 shares outstanding in
1996 and 318,997 in 1995, $100 per share
liquidating preference, aggregating
approximately $35,424,000 in 1996 and
$31,900,000 in 1995 $ 35,424 $ 31,900
</TABLE>
All outstanding shares of Series C preferred stock are held by the ESOP. The
holders of the Series C preferred stock are entitled to cumulative dividends
at an adjustable rate from the date of issue. The dividend rate (16.75% at
June 29, 1996) is adjusted quarterly in accordance with a formula based on
the prime rate. The dividends are payable annually on June 30 in cash, or at
the option of the Company in shares of Series C preferred stock. Additional
dividends on unpaid dividends accrue at the dividend rate and are recorded as
interest expense. During fiscal 1996, the Company issued 56,193 shares of
Series C preferred stock in payment of $5,275,000 of dividends and $344,000
of interest on unpaid dividends. During 1995, the Company issued 53,438
shares of Series C preferred stock in payment of $4,996,000 of dividends and
$348,000 of interest on unpaid dividends. During 1994, the Company issued
35,130 shares of Series C preferred stock in payment of $3,344,000 of
dividends and $169,000 on interest on unpaid dividends. The Series C
preferred stock is redeemable at the option of the Company. The redemption
price is $100 per share. In addition, participating employees of the ESOP
who receive Series C preferred stock upon termination of service from the
Company are entitled to have that stock redeemed by the Company. The Series
C preferred stock is non-voting.
<F15>
<PAGE>
Changes in Series C preferred stock are as follows:
<TABLE>
<CAPTION>
<S> <C>
Amount in
Thousands
Balance at June 26, 1993 $ 24,784
Issuance of 35,130 shares of Series C preferred stock 3,513
Purchase of 4,436 shares of Series C preferred stock (444)
Balance at June 25, 1994 27,853
Issuance of 53,438 shares of Series C preferred stock 5,344
Purchase of 12,972 shares of Series C preferred stock (1,297)
Balance at June 24, 1995 31,900
Issuance of 56,193 shares of Series C preferred stock 5,619
Purchase of 21,153 shares of Series C preferred stock (2,095)
Balance at June 29, 1996 $ 35,424
</TABLE>
8. REDEEMABLE COMMON STOCK
Redeemable common stock represents the redemption value of common stock held
by the ESOP or by retired or terminated employees as a result of distributions
from the ESOP. The redemption value of common stock is determined annually by
an independent appraisal.
Changes in redeemable common stock are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Number of Amount in
Shares (in thousands)
Balance at June 26, 1993 223,646 $ 3,858
Decrease in market value of common stock (1,911)
Redemption of common stock (5,271) (91)
Balance at June 25, 1994 218,375 1,856
Decrease in market value of common stock 229
Redemption of common stock (9,595) (81)
Balance at June 24, 1995 208,780 2,004
Decrease in market value of common stock 119
Redemption of common stock (11,624) (112)
Balance at June 29, 1996 197,156 $ 2,011
</TABLE>
<F16>
<PAGE>
9. INCOME TAXES
Effective June 27, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
June 29, June 24,
1996 1995
(in thousands)
Deferred tax assets:
Net operating loss carryforwards $ 3,464 $ 2,447
Inventories, principally due to obsolescence
reserves and additional inventories cost for
tax purposes pursuant to the Tax Reform Act
of 1986 816 901
Accounts receivable, principally due to
allowance for doubtful accounts 371 344
Accrued warranty 473 519
Accrued employee benefits 6,072 7,249
Loss on sale of plant 673
Alternative minimum tax credit carryforwards 371 338
Other 821 635
Total deferred tax assets 13,061 12,433
Less valuation allowance (12,926) (11,834)
Net deferred tax assets 135 599
Deferred tax liabilities:
Facilities, principally due to diferences in
depreciation 135 599
Net deferred taxes $ 0 $ 0
</TABLE>
The components of loss before income taxes and provision for income taxes are
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
June 29, June 24, June 25,
1996 1995 1994
(in thousands)
Loss before income taxes:
Domestic $ (5,348) $ (4,013) $(22,332)
Foreign (34) 790 (367)
Total $ (5,382) $ (3,223) $(22,699)
Provision (credit) for income
taxes:
State and local $ 65 $ 61 $ 194
Foreign 0 (2) 142
Total $ 65 $ 59 $ 336
</TABLE>
<F17>
<PAGE>
A reconciliation of the provision for income taxes with amounts determined by
applying the U.S. statutory federal income tax rate of 35% to loss before
income taxes is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
June 29, June 24, June 25,
1996 1995 1994
(in thousands)
Tax credit at statutory rate $ (1,884) $ (1,128) $ (7,945)
State and local income taxes,
net of federal effect 42 40 126
Permanent differences, principally
goodwill amortization 584 187 347
Losses for which tax benefit not
provided 1,323 960 7,808
Provision for income taxes $ 65 $ 59 $ 336
</TABLE>
At June 29, 1996, the Company had unused U.S. net operating loss carryforwards
of $8,660,000 which expire in the years 2009 through 2011. No provision was
made in 1996 for U.S. income taxes on the undistributed earnings of the
foreign subsidiaries as it is the Company's intention to utilize the earnings
in foreign operations for an indefinite period of time.
10. EMPLOYEE BENEFIT PLANS
Defined benefit pension plans covering salaried employees generally provide
benefits based on years of service and compensation during an employee's last
years of employment. Plans covering hourly employees generally provide
benefits of stated amounts for each year of service. All defined benefit
pension plans are funded based on annual independent actuarial valuations.
Net defined benefit pension expense includes the following components:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
June 29, June 24, June 25,
1996 1995 1994
(in thousands)
Service cost $ 103 $ 403 $ 486
Interest cost on projected benefit
obligation 797 847 1,092
Return on plan assets (1,526) (384) (390)
Net amortization and deferral 1,055 145 545
Net defined benefit pension expense $ 429 $ 1,011 $ 1,733
</TABLE>
<F18>
<PAGE>
The following table presents defined benefit pension plans funded status as of
April 1, 1996 and 1995, the most recent measurement dates:
<TABLE>
<CAPTION>
<S> <C> <C>
June 29, June 24,
1996 1995
(in thousands)
Actuarial present value of:
Vested benefits $ 9,907 $ 8,425
Nonvested benefits 278 1,447
Accumulated benefit obligation $ 10,185 $ 9,872
Projected benefit obligation $ 10,185 $ 9,930
Less plan assets at fair value 8,898 7,701
Projected benefit obligation in excess of
plan assets 1,287 2,229
Adjustment required to recognize minimum
liability 837 2,385
Unrecognized net loss (547) (1,479)
Unrecognized past service cost (59) 8
Less unrecognized net obligation (231) (896)
Net pension liability $ 1,287 $ 2,247
</TABLE>
The discount rate used in determining the actuarial present value of benefit
obligations was 7.50% in 1996 and 8.25% in 1995. The expected long-term rate
of return on plan asset was 8.5% in 1996 and 1995. Plan assets consist
primarily of investments in common trust funds of a bank.
Effective August 31, 1994, the Company froze pension benefits under its
defined benefit pension plan covering salaried employees. Accordingly, no
future accruals will be made for service subsequent to that date. In
connection with the Hamilton, Ohio plant closure (Note 1), the Company
recorded a loss of approximately $767,000 associated with the curtailment of
the Hourly Union Plan.
The Company also sponsors several defined contribution plans. No Company
contributions were made to these plans for the years ending June 29, 1996,
June 24, 1995 and June 25, 1994.
On May 13, 1987 the Company's Board of Directors adopted the Mosler
Employee Stock Ownership Plan (ESOP) effective July 2, 1986. The ESOP is a
noncontributory defined contribution stock bonus plan in which all domestic
employees not covered by a collective bargaining agreement of the Company are
eligible. The ESOP invests in the Company's Series C and Series D preferred
stock and common stock. Contributions are discretionary, but will not exceed
15% of aggregate total compensations to participating employees.
Contributions to the ESOP are allocated to participants' accounts in
proportion to the participant's compensation and vest over a seven-year
period. No contributions were made for the years ending June 29, 1996,
June 24, 1995 and June 25, 1994.
Upon termination of service from the Company, participating employees of the
ESOP are entitled to have capital stock allocated to their ESOP account
redeemed by the Company. Under the credit agreement (see Note 4), the
Company is permitted, within limitations, to repurchase the capital stock
directly from the terminated or retired employees. During fiscal 1993, the
trustees of the ESOP elected to make participant distributions in
substantially annual equal payments over five years.
<F19>
<PAGE>
The Company provides certain health care and life insurance benefits for
retired employees. Entitlement to these benefits is contingent on years of
service with the Company, age at retirement and collective bargaining
agreements. Cost sharing provisions are also based on these same conditions.
Effective June 27, 1993, the Company adopted the provisions of SFAS No. 106,
"Employer's Accounting for Postretirement Benefits Other Than Pensions."
Under SFAS 106, the Company records such postretirement benefits during the
periods in which employees provide services for such benefits. Previously,
the Company expenses the related cost as the benefits were paid. The Company
elected immediate recognition of the transition charge associated with
adopting SFAS 106 by recording a one-time non-cash charge of $10.3 million,
as a cumulative effect of change in accounting principles. The adoption of
SFAS 106 also resulted in additional charges to operating income during
fiscal 1994 of approximately $1 million.
The following table represents the components of the Company's liability for
future post-retirement benefits other than pensions:
<TABLE>
<CAPTION>
<S> <C> <C>
June 29, June 24,
1996 1995
(in thousands)
Accumulated postretirement benefit obligation
Retirees $ 2,048 $ 1,773
Fully eligible active participants 1,126 946
Other active participants 5,294 4,996
Total 8,468 7,715
Unrecognized net loss 2,182 4,518
Total $ 10,650 $ 12,233
</TABLE>
The transition obligation represents accumulated postretirement benefits
associated with service already rendered by eligible current and former
employees. The Company has made no commitments to increase these benefits for
existing retirees or for employees who may become eligible for these benefits
in the future. Currently, there are no plan assets and the Company funds
benefits as claims are paid.
The postretirement benefit cost for fiscal 1996 was $999,664, of which service
cost, interest cost, and net amortization (including deferrals) were $506,925,
$667,712, and ($174,973), respectively. The postretirement benefit cost for
fiscal 1995 was $1,100,000, of which service cost, interest cost and net
amortization (including deferrals) were $540,000, $670,000 and ($110,000),
respectively. The postretirement benefit cost for fiscal 1994 was $1,500,000,
of which service cost and interest cost were $600,000 and $900,000,
respectively.
Under the provisions of FAS 106, the post-retirement benefit obligation was
determined by application of terms of medical and life insurance plans
together with relevant actual assumptions and health care cost trend rates
projected at annual rates ranging from 11% in fiscal 1996 declining to 5.5%
for fiscal 2002 and thereafter. The discount rate used in determining the
actuarial present value of benefit obligations was 7.50% and 8.25% in fiscal
1996 and fiscal 1995, respectively. In fiscal 1996, the effect of a one
percentage point annual increase in these assumed cost trend rates would
increase the obligation by $775,864, and would increase the annual net
periodic postretirement health care benefit cost by $145,456, of which
service cost and interest cost would be $80,957 and $64,499, respectively.
<F20>
<PAGE>
In connection with the Hamilton, Ohio plant closure (Note 1), the Company
recorded a gain of $2,383,000 associated with the curtailment of the medical
plans.
11. LEASES
Minimum future rent payments approximating $8.5 million under commitments for
noncancelable operating leases with initial lease terms greater than one year
as of June 29, 1996, principally for sales and service facilities, are
payable $2.2 million, $2.9 million, $1.2 million, $.8 million and $.6 million
from fiscal 1997 through fiscal 2001, respectively, and $.8 million
thereafter.
Rent expense was $7.9 million, $7.3 million and 6.9 million for the years
ended June 29, 1996, June 24, 1995 and June 25, 1994, respectively.
12. STOCK OPTION PLAN
The Company's 1990 Stock Option Plan, as amended, provides for the granting
of options to purchase up to 160,000 shares of $.10 par value common stock.
Options may be granted at an exercise price of $10 per share. The options
generally become exercisable 50% three years after date of grant and 25%
annually thereafter. Options generally expire at the end of ten years from
the date of grant. A summary of the stock option transactions for the years
ended June 29, 1996, June 24, 1995 and June 25, 1994 follows:
<TABLE>
<CAPTION>
<S> <C>
Outstanding
Stock
Options
Balance at June 26, 1993 108,825
Granted 45,502
Canceled/expired (17,350)
Balance at June 25, 1994 136,977
Granted 6,700
Canceled/expired (73,000)
Balance at June 24,1995 70,677
Granted 5,000
Canceled/expired (10,627)
Balance at June 29, 1996 65,050
</TABLE>
At June 29, 1996, 160,000 shares of common stock are reserved for issuance.
<F21>
<PAGE>
13. SEGMENT INFORMATION, FOREIGN OPERATIONS AND MAJOR CUSTOMERS
The business of the Company is conducted in one industry segment, physical
security products and electronic security systems. Operations outside the
United States accounted for approximately 6%, 6% and 7% of net sales for the
years ended June 29, 1996, June 24, 1995 and June 25, 1994, respectively.
Total assets outside the United States were approximately 4%, 4% and 6% of
total assets at June 26, 1996, June 24, 1995 and June 25, 1994.
Sales to United States government agencies and contractors amounted to
approximately 4%, 4% and 6% of the net sales for the years ended June 29,
1996, June 24, 1995 and June 25, 1994, respectively.
14. STOCKHOLDER AGREEMENTS
The Company has buy-sell agreements with its stockholders that (1) require an
employee stockholder to sell to the Company and the Company to purchase from
an employee stockholder all outstanding shares held by the stockholder in the
event of termination for any reason, (2) restrict the transfer of common stock
of the Company and (3) provide the Company and/or its remaining stockholders
the right of first refusal in the event a bona fide offer from a third party
is received by a stockholder. The provisions of these buy-sell agreements
are modified in the event of an initial public offering of the Company's
common stock, or on the occurrence of a change of control of the Company
resulting in the Company's present largest shareholder owning less than 30%
of the common stock of the Company.
15. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental disclosures with respect to cash flow information are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
June 29, June 24, June 25,
1996 1995 1994
(in thousands)
Cash paid during the year for:
Interest $ 14,597 $ 14,460 $ 10,183
Income taxes 140 383 122
</TABLE>
During fiscal years 1996, 1995 and 1994, the Company issued shares of Series
C preferred stock in payment of $5,275,000, $4,996,000, and $3,344,000 in
dividends which were accrued on the Series C preferred stock, and recorded
dividends of $2,544,000, $2,544,000 and $2,564,000 by issuing shares of
Series D preferred stock, respectively.
16. CONTINGENCIES
The Internal Revenue Service (IRS) has conducted examinations of the
Company's federal income tax returns for the fiscal years 1988 through 1993
and has proposed various adjustments to increase taxable income. The Company
agreed to certain issues and has paid all tax due with respect to those
issues. Three issues remain unresolved, and the IRS has issued a notice of
proposed adjustment on these issues. The issues relate to 1) the allocation
of the Company' purchase price of assets from American Standard, 2) the value
of the Company's Series C preferred stock contributed to its ESOP and 3) the
deduction of certain costs incurred in connection with a 1990 transaction.
<F22>
<PAGE>
The Company allocated approximately $70 million of the purchase price of
assets from American Standard to intangible assets which are being amortized
over a period of generally 14 years. The IRS proposes to reduce this
allocation to approximately $45 million and increase the amortization period
to generally 45 years.
From 1990 through 1993, the Company contributed to its ESOP, and claimed a
tax deduction for, shares of Series C preferred stock having a value
aggregating approximately $9.6 million. The IRS proposes to reduce this
value to approximately $7.1 million.
The Company capitalized costs amounting to approximately $7.1 in connection
with a 1990 transaction involving debt and common stock, and is amortizing
such costs over the life of the related debt. The IRS has taken the position
that all costs incurred in connection with a redemption of stock are
non-deductible and proposes to disallow the full amount.
If the IRS's proposed adjustments are sustained, the Company would be liable
for additional income taxes of approximately $5.3 million plus interest, and
would lose the benefit of substantial deductions in future years.
Management believes that it has meritorious defenses to the adjustments
proposed by the IRS and that the ultimate liability, if any, resulting from
this matter will have no material effect on the Company's consolidated
financial position. The significance of this matter on the Company's future
operating results depends on the level of future results of operations as well
as on the timing and amount of the ultimate outcome.
Various lawsuits and claims arising during the normal course of business are
pending against the company. In the opinion of management, the ultimate
liability, if any, resulting from these matters will have no significant
effect on the company's consolidated financial position, results of
operations or cash flows.
* * * * * *
<F23>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-END> JUN-29-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 54,172,000
<ALLOWANCES> 993,000
<INVENTORY> 13,528,000
<CURRENT-ASSETS> 575,000
<PP&E> 44,492,000
<DEPRECIATION> 33,091,000
<TOTAL-ASSETS> 109,125,000
<CURRENT-LIABILITIES> 48,890,000
<BONDS> 132,948,000
<COMMON> 254,000
0
75,726,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 109,125,000
<SALES> 111,359,000
<TOTAL-REVENUES> 218,260,000
<CGS> 88,190,000
<TOTAL-COSTS> 169,136,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,526,000
<INCOME-PRETAX> (5,382,000)
<INCOME-TAX> 65,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,447,000)
<EPS-PRIMARY> (6.51)
<EPS-DILUTED> 0
</TABLE>